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Unit-V Rural banking-Rural credit-Objective-Deposit mobilization-MicrofinancePriority

ssector advances-Agriculture debt relief (Inclusive of enactment).

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 CHAPTER-

RURAL BANKING

A rural bank can be defined as rural financial institution/ cooperative/ community

bank or deposit taking financial institution that provides customised financial services to rural
communities. As a huge section of the country resides in rural areas, it is important from a
financial inclusion aspect that rural branches exist to cater to the population. 65-70 percent of
the population in India resides in rural area.

The regional rural banks were established with a view to developing the rural economy by
providing, for the purpose of development of agriculture, trade, commerce, industry and other
productive activities in the rural areas credit and other faculties, particularly to small and
marginal farmers, agricultural labourers artisans and small entrepreneurs and for matters
connected therewith and incidental thereto. The institution of Regional Rural Banks (RRBs)
was created to meet the excess demand for institutional credit in the rural areas particularly
among the economically and socially marginalised sections. In order to provide access to
low-cost banking facilities to the poor, the Narsimham Working Group proposed the
establishment of a new set of banks, as institutions which could help the rural population and
solve tehir financial problem . RRBs tended to mobilize deposits, access to central money
markets and modernized outlook which the commercial banks have

Regional rural banks (RRBs) are Indian scheduled commercial banks operating at
regional level in different states of India. They have been created with a view of serving
primarily the rural areas of India with basic banking and financial services. The area of
operation of Regional Rural Banks is limited to the area as notified by Government of India
covering one or more districts in the state. Regional Rural Banking perform various
functions. These are as follows:
 Providing banking facilities to rural and semi-urban areas
 Carrying out government operations like disbursement of wages of
MGNREGA workers, distribution of pensions etc.
 Providing para-banking facilities like locker facilities debit and credit cards,
mobile banking internet banking etc.
 Functions of Regional Rural Bank Regional Rural Bank grant loans and advances to
small farmers and agricultural labourers so that they can start their own farming
activities including purchase of land, seeds and manure. The RRBs charge a lower
rate of interest and thus they reduce the cost of credit in the rural areas

Functions of RRBs are as follows:

 RRBs grant loan and advances to small farmers and agricultural labourers so that
can start their own farming activities including purchase of land seed and manure.

 RRBs provide banking services at the doorsteps of the rural people particularly in
those areas which are not served by any commercial bank.

 The RRBs charge a lower rate of interest and thus they reduce the cost of credit in
the rural areas.

 RRBs provide loan and other financial assistance to entrepreneurs in villages sub-
urban areas and small towns so that they become able to enlarge their business.

 Loans to artisans to encourage them for the production of artistic and related goods.

 Encourage the saving habit among the rural and semi-urban population.

A rural bank focuses on providing savings and credit services to people who live in
rural areas. The financial products offered respond to the needs of its clients.

A rural bank is a smaller size in assets than the very large banks.

It is located generally in smaller cities and concentrates in making loans and other
services to that immediate locations.

Rural banking has become integral to the Indian financial markets.

With the majority of Indian population still living in rural or semi urban area.

The Government of India and Reserve Bank of India have been continuously working
to achievewl inclusion, that is, timely and sufficient access to financial services and credit at
an affordable cost in the vast expanse of our country.
Various Regional Rural Banks have been set up under the Regional Rural Banks Act, 1976 to
provide a continuous source of credit for agriculture and other activities. These banks were
set up with the aim of reaching every corner of the country and cater to financial needs of
rural society comprising small and marginal farmer, agricultural labourers, self-help groups,
artisans etc. The credit to weaker sections was made haggle-free and given at cheap or
concessional rates.

RBI has also encouraged the spread of these banks by undertaking the following:

 Allowing non-target group financing for RRBs

 Recapitalisation and restricting of RRBs

 Simplification of banking procedures as per Gupta committee recommendations

 Special credit plans

 Kisan credit cards
 Deregulation of banking rates

 Various relaxations in investment policies and non-fund business

 Allowing direct access to refinance assistance at concessional rates for RRBs

Over the last two decades, India has been among one of the fastest growing

economies in the world. The country is mainly rural with 65 percent of population

residing in rural areas. Despite rapid urbanization, rural India is still the largest

contributor to India’s Gross Domestic Product (GDP) alongside contribution of

46 percent to National Income. As per the Economic Survey 2022-23, 65% of India’s
population lives in the rural areas and 47% of the population is dependent on agriculture for
livelihood.

Contrary to the common perception about predominance of agriculture in the rural economy,
about two thirds of rural income is now generated in nonagricultural activities.
According to the Economic Survey, the agriculture sector has grown at an average annual
growth rate of 4.6% in the past six years. With majority of population residing in the rural
India, the growth, income and consumption patterns are the driving force for demand
generation, reviving the economy and sustaining the economic growth. The Indian rural
markets have become powerful market drivers. The businesses are super excited by the
growth propelled by these Indian markets especially due to increase in purchasing power

of the rural consumer. Several factors have contributed towards the increased confidence in
rural India’s economy:

 Increase in income of the rural migrants promoting higher remittances.

 Increase in share of non-farm activities in the rural areas.
 Increase in farm income with due support from the government.
 Increase in government spending in rural projects.
 Easy availability of rural finance and credit for rural population.

As stated above, the rural economy consists of two subsectors that hold key to its growth and
development. These are the agricultural subsector and nonagricultural subsector. The roles of
both these sectors cannot be undermined in the rural economy and development.

1. The Role of Agricultural Subsector in Rural Economy

The rural sector including the rural industries, trade and commerce are the basic

foundation of India’s economy. Over the years, it is evident that attention to the

programs and schemes that impact the rural sector positively are the key emphasis

of planning and execution of the national development. The agriculture and allied

activities are the mainstay of the rural economy and contribute to the same.

(iii) Source of Raw Materials

Agriculture is one of the major sources of raw materials for the country’s leading

industries like sugar, cotton, jute, textiles, tobacco, leather, edible oils and many

more. Industries like food processing, handlooms, cereal processing and oil

production are solely dependent on agriculture for the raw material.

(iv) Source of Foreign Exchange

The agriculture is also an important source of foreign exchange for the country.

The rising dominance of the country in agricultural export has resulted in increased

contribution to national overall economic development. Today, the nation occupies

Economic Features a leading position in agricultural exports and is not only supporting the
local population but also fetching higher net foreign exchange. Today, the country is a

leading exporter of raw cotton, oil meals, rice, spices, sugar, tea, coffee, fresh

vegetables, pulses, dairy products and many more. According to the Economic

Survey, marine, rice, sugar and spices have witnessed an increasing export trend

in 2019-20.

(v) Market for Industrial Goods and Services

Agriculture and allied industries also contribute to the rural economy by providing

a huge market to the industrial goods and services. Pesticides, insecticides, fertilizers,

seeds, farm equipment, livestock feed, veterinary medicines and services,

agricultural services including consulting, etc. are serving markets for the agriculture

subsector.

2. The Role of Non-agricultural Subsector in Rural Economy

Yet another segment that contributes towards the rural economy is that of nonagricultural
subsector also referred to as non-farm sector or activities. The sector has recently been
highlighted owing to its potential to augment the income of the rural population. While the
agriculture still remains the mainstay of the rural economy, the fact cannot be overlooked that
its share is steadily declining. Also not the entire rural population is engaged in agriculture
and allied services. Many are landless and are engaged in non-farm activities like household
and non-household manufacturing, handicrafts, processing, repairs, construction, mining and
quarrying, transport, trade, communication, community and personal services, etc. in rural

areas. The rural non-farm sector is therefore very important and offers livelihood
opportunities to men, women and youth in the various non-farm activities. Understanding the
significance of non-farm sector, the government since long has been developing roadmaps to
increase its impact on the rural economy.

Several bodies and schemes have been launched to add impetus to the growing

contribution of non-farm sector in rural economy and development. The Khadi

and Village Industries Commission (KVIC) runs several programs for the

development of the sector. It has identified industries that are categorized into the

seven types including, mineral, forest, agro, polymer and chemical, engineering

and non-conventional energy based, textile and service based industries.

A Slew of Government-funded Schemes

Over the years, the Government of India has introduced a large number of schemes

to diversify the rural population into non-farm activities. Some of them are as

follows

The Mahatma Gandhi National Rural Employment Guarantee Act

(MGNREGA), 2005: It provides one hundred days of guaranteed wage

employment in every financial year to every household whose adult members

volunteer to do unskilled manual work.

Deendayal Upadhyaya Grameen Kaushal Yojana: It is implemented

by the Ministry of Rural Development to drive the national agenda for inclusive

growth, by developing skills and productive capacity of the rural youth from

poor families. It funds training projects benchmarked to global standards,

with an emphasis on placement, retention, career progression and foreign

placement.

Deendayal Antyodaya Yaojana-NRLM: It seeks to alleviate rural

poverty through building sustainable community institutions of the poor.

Aajeevika Grameen Express Yojana (AGEY): It is related to

operating road transport service in backward areas by the SHGs which

provide an additional avenue of livelihood for the people living in the area.

Pradhan Mantri Mudra Yojana (PMMY): Under this scheme collateral

free loans are provided by Banks, Non-Banking Financial Companies

(NBFCs) and Micro Finance Institutions (MFIs) to small/micro business

enterprises in the non-agricultural sector to individuals to enable them to set

up or expand their business activities.

PROBLEMS RELATED TO RURAL DEVELOPMENT

The concept of problems and challenges for rural development in India stems

mostly from the characteristics of the rural sector itself. These include:

Problems

(i) Excessive dependence on nature

(ii) Prevalence of small and uneconomic land and livestock holdings

(iii) Low capital – labour ratio

(iv) Low factor productivity

(v) Low gestation and low rate of turnover

(vi) High poverty

(vii) Predominantly illiterate and unskilled workforce

(viii) Lack of basic infrastructure

Let us briefly explain these factors.

(i) Excessive dependence on nature: The mainstay of rural economy is

agriculture and allied activities. The dependence therefore exists heavily on

nature including weather and climatic conditions. Natural calamities like

draught, flood, etc., affect activities in the rural area and not much can be
done to mitigate the risks associated with them.

(ii) Prevalence of small and uneconomic land and livestock holdings:

The rural sector is also characterised by small and uneconomic land and

livestock holdings. The fragmented holdings of small and marginal farmers

in the country are highly unproductive and not financially viable. The high

number of small and marginal farmers in the country is a challenge for the

policy makers.

(iii) Low capital-labour ratio: The capital-labour ratio in the country is very

low, thereby affecting the productivity negatively. A large amount of public

and private investment therefore is the key requirement to facilitate

development of any kind which at times is highly challenging.

(iv) Low factor productivity: Low factor productivity is yet another challenging

issue that affects the rural development programs. Inadequate capital for

production inputs, raw materials, machines and equipment, etc., adversely

affects and does not complement the rural development process at many

instances.

(v) Long gestation & low rate of turnover: Most of the activities in the rural

sector are characterized by long gestation period and low rate of turnover.

The slow output often restricts the return on investment and poses a challenge.

(vi) High poverty: Rural poverty has posed serious challenges in realising the

dream of better life for rural India. The data from NSSO(National Sample Survey
Organisation) survey reveals that

poverty in the rural areas still remain the biggest challenge for any government.

(vii) Predominantly illiterate and unskilled workforce: Rural sector is also

plagued by illiterate and unskilled workforce. The higher level of illiteracy

and lack of skills are a serious impediment to rural developments

(viii) Lack of basic infrastructure: One of the most serious challenges faced

by the rural sector is that absence of basic infrastructure. Over the years

several attempts have been made to create basic infrastructure in the rural

areas. Schemes like MNREGS, National Rural Health Mission (NRHM) ,

Sarva Shiksha Abhiyan (SSA) etc., have made it possible

to a great extent. However, lack of basic infrastructure in rural villages cannot

be unaccounted for and is a challenge for the rural development landscape.

Initiatives Related to Rural Empowerment?

 Deen Dayal Upadhayay Grameen Kaushalya Yojana

 Pradhan Mantri Kaushal Vikas Yojana

 Pradhan Mantri Matru Vandana Yojana

 Mahatma Gandhi National Rural Employment Guarantee Act

 National Rural Livelihood Mission

 Pradhan Mantri Awas Yojana

 DEPOSIT MOBILIZATION

What is Deposit mobilization ?

Deposit mobilization is the process of mobilizing funds by financial institutions from the
surplus units to the deficit units to create better opportunities for productive investment.

It is an important source of working fund for the bank.

The success of the banking greatly lies on the deposit mobilization. Performances of the bank
depend on deposits, as the deposits are normally considered as a cost effective source of
working fund.

Mobilization of rural savings is one of the important objectives of the Commercial Banks. It
helps to expand banking operations.

The RBI encourages the banks to mobilize deposits, by providing subsidy for branch
expansion.
 Chapter

MICRO FINANCE IN RURAL INDIA

Microfinance is defined as financial services such as savings account, insurance funds and
credit given to poor and low income people to provide better standard of living.

Its goal is to provide financial support to the villagers and poor farmers in rural India . The
most important function of microfinance in India is to provide small business owners with
access to money.

It plays a major role in the development of India. It acts as an anti-poverty vaccine for the
people living in rural areas.

Nearly 60% of population in India which is the second largest populated country, depends
agriculture sector, consequently leads which leads to underemployment and that in
consequence further leads to low per capita income.

Micro finance includes the following products:

Microloans: The special feature of the microloans is that it is provided with no collateral. It
offers a better overall loan repayment rate than traditional banking product.

Micro savings: It allows the small entrepreneurs to operate savings bank account with no
minimum balance. It helps users inculcate financial discipline and develop an interest in
saving for future.

Micro Insurance: It is a type of coverage provided to borrowers of microloans. It protects

the poor people from all the mishap that might take place in future. Example: Accidents,
chronic disease etc.

Microfinance in India:

The term Microfinance came into existence in 1970s when organizations such as Grameen
Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were starting and
shaping the modern industry into microfinancing. Even in India, its origin is back to the early
1970s when Self Employed Women’s Association (SEWA) of the state of Gujarat formed an
urban cooperative bank, called the Shri Mahila SEWA Sahakari Bank, with the objective of
providing banking services to the poor women.

Microfinance and its facets:

 Microfinance is an essential part of rural finance.

 It does not require any collateral.

 The purpose of microfinance is to lend a helpful hand towards needy / low income people.

 A small amount ranging from Rs. 20,000 to Rs. 30,000 is availed.

 The tenure of the loan is really short as the amount of loan is too small.

 It focusses to generate income for the poor people.

 It is more service oriented and less profit oriented.

 It is one of the most effective and warranted Poverty Alleviation Strategies.

 It is provided through the NGOs, generally referred Self Help Groups (SHGs).

 Conduct research on demand for finance and savings behavior of borrowers to determine
the mix of multipurpose loans.

Top 10 Microfinance institutions in India:

1. State Bank of India

2. Ujjivan Financial Services

3. Equitas Small Finance Bank Ltd.

4. M&M Financial Services

5. Sundaram Finance Ltd

6. Bandhan Financial Services

7. Bharat Financial Inclusion Ltd

8. Muthoot Microfin Ltd

9. Janalakshmi Financial Services

10. MUDRA Bank

In India microfinance operates through two channels:

The search for delivering financial services to rural poor in a sustainable manner led to two

distinctive approaches for extending microfinance in India, called

 Self Help Group – Bank Linkage Programme (SHG-BLP)

 Micro Finance Institutions

[Link]- Bank Linkage Programme (SBLP)

The SHG-BLP has become success of a microfinance programme globally with an outreach
to millions of families, providing social, economic and financial empowerment to the rural
poor, especially women. SHG Model is one of the two approaches to reach the poor. It leads
the scenario in India in terms of clients’ outreach, loan amount disbursed, savings etc.

It becomes feasible only when members merge their resources together towards a common
fund.

Various kinds of skill development training are also provided to the members to make them
self-employed at very low cost and capital involvement.

2. Micro Finance Institutions (MFIs) Microfinance – A lifeline for poor rural people

Microfinance institutes often target women as customers. Because it has a much greater

impact on household consumption and the quality life for children.

 Poor rural people need to access a wide variety of financial services not just credit. They
need secure, convenient deposit services that allow for small balances, small transactions and
easy access to funds.

 In India, SHGs are being developed and linked to commercial banks, giving rural people
access to financial services on a massive scale.
Some of the important features of Microfinance are listed below:

Microfinance do not require any collateral

The keystone feature of the microloans under microfinance is that it does not require any
collateral.

The borrowers are generally poor people.

The purpose of microfinance is to lend a helpful hands towards needy people. So generally
the borrowers of microfinance are the people belonging to underdeveloped part of India and
Small businessmen or entrepreneurs.

Small Amounts: The money which can be availed under microfinance are usually the small
amount. For instance Microloans. The money given in the form of microloans under
microfinance to the poor section of the society and small businessman are usually in a small
amount ranging in between 20,000 – 30,000rs in India.

The loan tenure is short

The tenure of the loan is really short as the amount given in the form of microfinance
is too small. The borrowers have to repay the amount the of loan in the prescribed time period
given by the banks. If it is not bound to pledge anything as a security for the repayment of the
loans. They need not worry about the assets that are required to be kept in banks for security
purpose.

The purpose of microfinance loans is to generate income

As it is well known that microfinance loans are only given to low income group
people and small businessmen. So the main focus of microfinance loans is to generate income
for the poor people of undeveloped part of India so they can work smoothly.

Each type of microfinance institution is different from the other in many ways but
they work towards the same goal- financial inclusion. Due to their operational
frameworks, some models have been less successful than others in attaining this
objective. In addition to the above, microfinance institutions can also be categorised into
large, medium and small scale. These institutions differ in terms of geographical reach,
infrastructure, manpower skills availability, funding and lending processes, revenues and
success in operations.

Different types of microfinance institutions in India

The microfinance models are developed in order to cope with the financial challenges in
financially backward areas. There are various types of microfinance companies operating
in India.

Joint Liability Group (JLG)

A joint Liability Group can be explained as an informal group consisting of 4-10

individuals who try to avail loans against a mutual guarantee from banks for the purpose
of agricultural and allied activities. This category generally consists of tenants, farmers
and other rural workers. They work primarily for lending purposes, although they also
offer a savings facility. In this type of institution, every individual of a borrowing group
is equally liable for the credit (Singh, 2010). This kind of institution is simple in nature
and requires little or no financial administration (UBI, no date).

However, one of the serious problems of this structure is personal preferences in lending
credit which resulted in a partial failure of the system. Of late due to various promotional
initiatives taken by banks such as Indian Bank, Karur Vysya Bank and Indian Overseas
Bank, the credibility of the Joint Liability Group model has received a boost (The Hindu,
2016). It still remains a landmark movement in the area of protection of farmers’ land
ownership rights.

Self Help Group (SHG)

Self Help Group is a type of formal or informal group consisting of small entrepreneurs
with similar kind of socioeconomic backgrounds. Such individuals temporarily come
together and generate a common fund to meet the emergency needs of their business.
These groups are generally non-profit organizations. The group assumes the responsibility
for debt recovery. The advantage of this micro-lending system is that there is no need for
collateral. Interest rates are also generally low and fixed especially for women
(Chowdhury, 2013; Business Standard, 2017). In addition, various tie-ups of banks with
SHGs have been implemented in the hope of better financial inclusion in rural areas
(Jayadev and Rao, 2012).

One of the most important ones is the NABARD SHG linkage program where many self-
help groups can borrow credit from banks once they successfully present a track record of
regular repayments of their borrowers. It has been very successful, especially in Andhra
Pradesh, Tamil Nadu, Kerala and Karnataka during the year 2005-06. These states
received approximately 60% of SGH linkage credit (Taruna and Yadav, 2016).

The Grameen Bank Model

The Grameen model was introduced by the Nobel laureate Prof. Muhammad Yunus in
Bangladesh during the 1970s. It has been widely adopted in India in the form of Regional
Rural Banks (RRB). The goal of this system has been the overall development of the rural
economy which generally consists of financially backward classes. But this model has not
been fully successful in India as rural credit and system of recovery are a real problem. A
huge amount of non-performing assets also led to the failure of these regional banks
(Shastri, 2009). Compared to this model Self Help Groups have been more successful as
they are more suited to the population density of India and far more sustainable (Dash,
2013).

Rural Cooperatives

Rural Cooperatives in India were set up during the time of independence by the
government. They used the mechanism to pool the resources of people with relatively
small means and provide financial services. Due to their complex monitoring structure,
their success has been limited. In addition, this system only catered to the credit-worthy
individuals of rural areas, not covering a large part of the country’s financially backward
section (Rajendran, 2012).

Lenders Offering Microfinance Loans To Mfis Institutions

Following are the lenders offering microfinance loans to the microfinance institution:
Reliance Money- Reliance company at the great rate of interest offers money to
microfinance institutions. The required documentation is very limited.

ICICI Bank– Since last 10 years ICICI Bank has been a partner with the micro finance
institutions and is successfully provide the loan to them. Currently the ICICI BANK is clearly
focusing on setting up a profitable and cordial relation with microfinance institutions and also
in the investing which can enable the growth of microfinance institutions in India.

State Bank of India - The state bank of India offers loans to the micro finance institutions and
NGOs that act as intermediaries for financing the financial needs of poor sector of society.

AXIS Bank - Axis bank offers loans to those institutions that economically empower the
small businessmen and low income earners.

DCB Bank - Development Credit Bank offers two types of product as part of micro financing
these are term loans and loans to microfinance institutions for on lending purposes.
 CHAPTER

Farm Loan Waiver

What is a Farm Loan Waiver?

 Farm loan waivers are customised schemes announced by states to help the peasants.
 When there is a poor monsoon or natural calamity, farmers may be unable to repay
loans. The rural distress in such situations often prompts States or the Centre to
offer relief — reduction or complete waiver of loans.
 Essentially, the Centre or States take over the liability of farmers and repay the
banks. Waivers are usually selective — only certain loan types, categories of
farmers or loan sources may qualify.
 Loan waivers, originally intended for a one-time settlement. However, the past two
decades have seen such schemes announced with increasing regularity, signalling the
chronic distress of the agricultural sector in India.
 Though these demands seem more legitimate in the wake of the loss of livelihood
due to lockdown amid Covid-19, yet such loan waivers may prove detrimental to
the banking system and credit culture.

What is the History of Farm Loan Waivers in India?

The first recorded instance of granting loans to peasants in medieval India

 There have only been two nationwide loan waiver programmes in India after
Independence: in 1990 and 2008.
o The first nationwide farm-loan waiver in independent India was implemented
in 1990 by the VP Singh-led government. It cost the exchequer Rs 10,000
crore.
o In 2008, the Agricultural Debt Waiver and Debt Relief Scheme, implemented
by the UPA government, involved an outgo of Rs 71,680 crore.
 Since then, there has been a wave of such schemes by different State
governments.
What is the Rationale Behind Waiving Off Farm Loans?

 Small Land Holding: More than 85% of small and marginal farmers in India
possess less than 1-2 hectares of holdings and lack basic inputs for farming.
 Dependency on Monsoon: In India, the crop yield and production are highly
dependent on monsoon.
 Need of Credit: In this context, the credit is a critical resource to farming
 households for carrying out crop production and meeting consumption & daily-life
expenses.
 Debt Trap: Farmers invest heavily in crops by taking loans. If the crop fails due to
lack of rains or insufficient market demand, farmers will get trapped in debt. Due to
this, there has been an increase in farmer suicides.
o Thereby, waiving farm loans address this humanitarian crisis.

What are the Issues Related to Farm Loan Waivers?

 Reputational Consequences: Loan waiver schemes will disrupt credit discipline as

farm loan waivers may act as a temporary solution and can prove to be a moral hazard
in future.
o This is because those farmers who can afford to pay their loans might not pay
it expecting a waiver.
 Free Rider Problem: Some farmers may take loans even if there is no need, in the
hope of the next loan waiver scheme. This will impact the farmers who are genuinely
in need of loans.
  Decline in Formal Access to Credit: After the implementation of debt waiver
schemes and subsequent losses to the banking industry, banks will be reluctant to
lend further to the farm sector.
o This leads to a rise in farmer’s dependence on informal sector lenders.
 Impact on Banking Sector: A report by the Indian Council for Research on
International Economic Relations stated that the 2008 farm-loan waiver led to three-
fold increase in non-performing assets of commercial banks between 2009–2010
and 2012–2013.
o This further affects credit-deposit ratio and risk-weighted capital adequacy
ratio, return on assets and economic value of equity of banks.
o This downgrades the ratings of banks in particular and destabilises the
functioning of the credit market in general.
 Against the Interests of Depositors: Banks receive money from the depositors and
lend money to borrowers under different contracts and agreements.
o Thus, the loss to the bank, due to loan waivers, is directly or indirectly
against the interests of the depositors.
o Moreover, banks being custodians of depositors’ money, need to be guided
primarily by the protection of depositors’ interests.

What Should be the Way Forward for Farm Loan Waivers?

 It appears that loan waiving can provide a short-term relief to a limited section of
farmers, it has a meagre chance of bringing farmers out of the vicious cycle of
indebtedness.
 There is no concrete evidence on reduction in agrarian distress following the first
spell of all-India farm loan waiver in 2008. In the longer run, strengthening the
repayment capacity of the farmers by improving and stabilising their income is the
only way to keep them out of distress.
 Lasting solutions like building irrigation capabilities and cold storage chains,
increased crop insurance coverage, farm infrastructure building, tech-enabled
productivity improvement and opening the sector to market forces and open trade can
help the farmers in the long run as a better option.
 Agrarian distress and farmers’ income will be addressed much better if States
undertake and sincerely implement long-pending reforms in the agriculture sector
with urgency.
 Alternatively, waiving only a portion of the loan instead of placing a cap on the
quantum of loan waiver will be an improvement towards averting moral hazards.
 There is also a need for creative engagement through which the surplus workers
in the farming sector can be taken away to more productive sectors and farming
can be made more profitable and sustainable for all the people

AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME, 2008

The Scheme covers direct agricultural loans extended to ‘marginal and small farmers’
and ‘other farmers’ by Scheduled Commercial Banks, Regional Rural Banks, Cooperative
Credit Institutions (including Urban Cooperative Banks) and Local Area Banks
(hereinafter referred to compendiously as “lending institutions”) as indicated in the
Guidelines.
Definitions

‘Direct Agricultural Loans’ means Short Term Production Loans and Investment Loans
provided directly to farmers for agricultural purposes. This would also include such loans
provided directly to groups of individual farmers (for example Self Help Groups and Joint
Liability Groups), provided banks maintain disaggregated data of the loan extended to each
farmer belonging to that group.

‘Short Term Production Loan’ means a loan given in connection with the raising of crops
which is to be repaid within 18 months. It will include working capital loan, not exceeding
Rs. 1 lakh, for traditional and non-traditional plantations and horticulture

‘Investment Loan’ means

(a) investment credit for direct agricultural activities extended for meeting outlays relating to
the replacement and maintenance of wasting assets and for capital investment designed to
increase the output from the land, e.g. deepening of wells, sinking of new wells, installation
of pump sets, purchase of tractor / pair of bullocks, land development and term loan for
traditional and non-traditional plantations and horticulture; and

(b) investment credit for allied activities extended for acquiring assets in respect of activities
allied to agriculture e.g. dairy, poultry farming, goatery, sheep rearing, piggery, fisheries,
bee-keeping, green houses and biogas.

‘Cooperative Credit Institution’ means a cooperative society that

i) provides short-term crop loans to farmers and is eligible for interest subvention from the
Central Government; or

ii) carries on banking activities regulated or supervised by RBI or

NABARD; or
iii) is part of the Short-Term Cooperative Credit Structure or LongTerm Cooperative Credit
Structure in a State or Union Territory.

‘Marginal Farmer’ means a farmer cultivating (as owner or tenant or share cropper)
agricultural land up to 1 hectare (2.5 acres).

‘Small Farmer’ means a farmer cultivating (as owner or tenant or share cropper) agricultural
land of more than 1 hectare and up to 2 hectares (5 acres).

‘Other Farmer’ means a farmer cultivating (as owner or tenant or share cropper) agricultural
land of more than 2 hectares (more than 5 acres).

Explanation:

1. The classification of eligible farmers as per the above landholding - would be based on the
total extent of land owned by the farmer either singly or as joint holder (in the case of an

owner-farmer) or the total extent of land cultivated by the farmer (as tenant or share cropper),
at the time of sanction of the loan, irrespective of any subsequent changes in ownership or
possession.

2. In the case of borrowing by more than one farmer by pooling their landholdings, the size of
the largest landholding in the pool shall be the basis for the purpose of classification of all
farmers in that pool as ‘marginal farmer’ or ‘small farmer’ or ‘other farmer’.

3. Farmer who has obtained principal loan amount does not exceed Rs.50,000, would be
classified as “small and marginal farmer” and, where the principal amount exceeds
Rs.50,000, he would be classified as ‘other farmer’, irrespective in both cases of the size of
the land holding, if any.

4. Direct agricultural loan taken under a Kisan Credit Card would also be covered under this
Scheme subject to these Guidelines.

5. A short-term production loan and an investment loan taken by a farmer shall be counted as
two distinct loans and the Scheme will apply to the two loans separately. Likewise, in the
case of a farmer who has taken two investment loans for two separate purposes, the two loans
shall be counted as two distinct loans and the Scheme will apply to the two loans separately.
Debt Waiver: In the case of a small or marginal farmer, the entire ‘eligible amount’ shall be
waived.

Debt Relief: In the case of ‘other farmers’, there will be a one time settlement (OTS)
Scheme, the farmer will be given a rebate of 25 per cent of the ‘eligible amount’ provided the
farmer pays the balance of 75 per cent of the ‘eligible amount’.

Implementation :

 Every branch of a scheduled commercial bank, regional rural bank, cooperative credit
institution, urban cooperative bank and local area bank covered under this Scheme.
The banks shall prepare two lists, one consisting of ‘small and marginal farmers’ who
are eligible for debt waiver and the second consisting of ‘other farmers’ .A farmer
classified as ‘small farmer’ or ‘marginal farmer’ will be eligible for fresh agricultural
loans upon the eligible amount being waived.
 A farmer classified as ‘other farmer’ eligible for OTS relief shall give an undertaking
agreeing to pay his share (that is eligible amount minus the amount of OTS relief) in
not more than three instalments and the first two instalments shall be for an amount
not less than one-third of his share. The undertaking shall be in such form as may be
prescribed by RBI/NABARD.
 The amount of OTS relief (i.e. the Central Government’s share) will be credited to the
account of the ‘other farmer’ upon the farmer paying his share in full.
 In the case of a short-term production loan, the ‘other farmer’ will be eligible for fresh
short-term production loan upon paying one-third of his share.
 In the case of an investment loan (for direct agricultural activities or allied activities),
the ‘other farmer’ will be eligible for fresh investment loan upon paying his share in
full.
 Reserve Bank of India shall be the nodal agency for the implementation of the
Scheme in respect of scheduled commercial banks, urban cooperative banks and local
area banks. NABARD shall be the nodal agency in respect of regional rural banks and
cooperative credit institutions.

Interest and charges

The lending institutions shall not charge any interest on the ‘eligible amount’ for any period
after February 29, 2008. However, in the case of an ‘other farmer’ who defaults in paying his
share of the eligible amount on or before June 30, 2009 and becomes ineligible for OTS
relief, the bank may charge interest for the period after June 30, 2009.

. Instalments of investment credit which fall overdue after 31.12.2007 shall be recovered by
the lending institutions along with the applicable interest.

Ministry of Finance will issue supplemental instructions to the lending institutions in respect
of all incidental and ancillary matters including instructions on interest and other charges that
shall not be claimed by the lending institutions from the farmer or the Central Government

Certificate of debt waiver or debt relief

 In the case of small and marginal farmers, upon waiver of the eligible
amount, the lending institution shall issue a certificate to the effect that the
loan has been waived and specifically mention the eligible amount that has
been waived.
 In the case of ‘other farmers’, upon granting OTS relief, the lending
institution shall issue a certificate to the effect that the loan account has been
settled to the satisfaction of the lending institution and specifically mention the
eligible amount, the amount paid by the farmer as his share and the amount
of OTS relief.
 The certificate shall be in such form as may be prescribed by
RBI/NABARD and upon issuing the certificate the lending institution shall take
an acknowledgement from the farmer.

Obligations of the lending institutions

 Every lending institution shall be responsible for the correctness and

integrity of the lists of farmers eligible under this scheme.
 Every lending institution shall appoint one or more Grievance
Redressal Officers for each State (having regard to the number of branches in
that State). The order of the Grievance Redressal Officer shall be final.
 Any farmer who is aggrieved on the ground that his name has not been
included in either of the two lists or on the ground
 that his name has been included in the wrong list or on the ground that the
relief granted to him has been calculated wrongly, may make a representation
through the branch from which he received the loan or directly to the
Grievance Redressal Officer of the lending institution concerned and every
such representation shall be disposed of within 30 days of receipt thereof.

Audit

The books of account of every lending institution that has granted debt

waiver or debt relief under this Scheme (including the books of accounts

maintained at the branches) shall be subject to an audit in accordance with

the procedure that may be prescribed by RBI/NABARD.

Publicity

 A copy of this Scheme in English and in the official language or

languages of the State/Union Territory shall be displayed in each branch of
every lending institution covered under this Scheme.
 A copy of this Scheme will be available on the websites of the Ministry
of Finance, Department of Financial Services; RBI; and NABARD.
 Interpretation and power to remove difficulties

. Monitoring

There shall be constituted a National Level Monitoring Committee

consisting of

(i) Secretary, Department of Financial Services, Ministry of Finance

– Chairperson

(ii) Secretary, Department of Agriculture and Cooperation, Ministry

of Agriculture

(iii) Deputy Governor, Reserve Bank of India;

(iv) Chairman, NABARD;

(v) Chairman and Managing Director of two public sector banks;

(vi) Chairman of two Regional Rural Banks; and

(vii) Managing Director of two State Level Cooperative Banks

to monitor the implementation of the Scheme