6.
FINANCING FOR
DEVELOPMENT
Capital Requirements of rural development
Infrastructural needs:
Roads, Buildings, Irrigation projects, etc
Establishments needs:
Schools, Hospitals, Banks etc
Government needs to do raise capital from the
activities in the rural sector. But the taxes levied
and taxes paid do not considerably contribute to
the cost.
So Government should have a different stand.
Break even point in rural development is far and
With out certain amount of national sacrifice economic
development will not occur. This sacrifice can take one or more of
the following forms
Working harder and more efficiently
Saving voluntarily to finance the development investment, public
or private
Paying higher taxes for the development investment.
Controlling inflation even if it is inconvenient to people
Encouraging foreign investments, even if it means threat to the
indigenous producers
Accepting foreign aid with strong commitment to fulfill the
conditions
Reforms in sectoral terms of trade
Domestic Institutional Sources
State and central Govt.
Consolidated fund of India
All revenue received, loans raised and
money received as the repayment of
loans by the Union form this.
Can’t touch it with out Parliament’s act.
Public Account of India
All other receipts, such as deposits,
service funds form this. No need of
Parliament approval.
The main sources of the Union tax
revenue are
Customs duties,
Union excise duties,
Corporate and income taxes.
The main sources of the state tax
revenue are
A share of the union taxes,
Extra taxes levied by the respective states,
Property taxes,
Terminal taxes
Union Budget- is an assessment of the upcoming year.
It is futuristic
Govt. is the oldest Financier for rural sector
Taccavi loans
Improvements Loans Act of 1883 [Long term]
And Agriculturists’ loans Act of 1884 [Short term]
Why is it not so popular?
Inordinate delays in sanctioning, Lack of
supervision, poor recovery, inadequate amount.
NFRD (National Fund for Rural Development)
Donors can make recommendations
RBI
RBI is a pioneer in the rural credit.
It was reluctant before 1947.
Its functions are
Financing
Promotional advisory and
coordinating functions
Regulatory functions
RBI feels investment in Form sector and
Non- Form sector is not up to the
expected pace.
NABARD
Established by RBI and GOI (50-50)
NABARD’s total funds stand at Rs.81,220 crore.
It’s functions:-
Refinance to the Cooperative banks and RRBs, CBs
Short term accommodation for special cases, and
overall policy, planning,
Coordination and monitoring of all agricultural and rural
lending
Training, research and consultancy relating to rural
credit.
GOI also provides the funds it receives from World bank etc.
It has entered into the Direct lending.
• NABARD works in close cooperation with many
central govt. agencies and takes up projects in the
following areas
– watershed development & management
– dry land farming
– wastelands development,
– forestry,
– aquaculture,
– Integrated Rural Development Programme etc.
• It also designs innovative schemes (such as
ROSCA)and grants to attract investment and activity
in the rural areas by NGOs, VAs and individuals.
• NABARD is also allowed to raise capital of
Rs.5000 crore in the form Rural Bonds
guaranteed by Govt. and with suitable tax
exemptions.
• A separate window for rural infrastructure
(such as roads) is established.
Cooperative Credit Agencies (CCAs)
Advantages:
• Being located in the neighborhood of the
borrowers, administration is easy.
• Easy assessment of credit worthiness
• Easy supervision
• Interest rate is very cheap
• Not too rigid nor too flexible processes
Disadvantages:-
• May benefit larger cultivators more often.
• Cooperative credit’s share is declining
• Inadequacy of the loan amount, promptness
• Political interferences
• 65% are not viable.
• Coordination between the authorities and
agencies.
Commercial Banks
Why nationalize banks?
Post 1990s
They sponsor some of the key
initiatives of the government.
Regional Rural Banks (RRBs)
• RRBs are state sponsored, rural oriented, and region
based low cost banks.
• Recommendation of Sri M. Narasimham committee.
• These are established by GOI, state govt and a
sponsor bank in the ration 50:35:15.
• As on March 2007 there are 196 RRBs covering 436
districts with 14500 branches.
• RRBs have unique advantage: proximity of
Cooperatives and acumen of CBs (due to sponsor
bank).
• SLR is fixed at lower level.
• The salaries and perks of the staff are kept on par with
the relative staff of state level employees.
• Though considered a fairly successful experiment,
RRBs track record in the recovery of the loans is not
very satisfactory.
• NABARD is leading many initiatives, also gives
assistance.
• Sponsor banks and RRBs work in very close
coordination under the MOU of Development Action
Plan. (49+53 banks have been selected for
restructuring)
SHG
• SHG is a small group of individual members, coming
together for a common purpose.
• Membership generally ranges from 10-25.
• SHGs can take up various activities ranging from CPR
management, animal husbandry and micro finance.
• NABARD launched “Linking SHGs with banks” with
collaboration of RBI, selected banks and NGOs to
support the formal credit system.
• Financing and forming of SHGs: a) By Banks b) By NGOs
& VAs (Others) And by c) Financial Intermediaries.
• NGOs act as facilitators and intermediaries
A state level review and coordination committee on credit deliver
innovations is set up, in which senior officials from RBI, State Govt.s,
NABARD will be members.
The Role of Non institutional lenders
Local money lenders command lot of money at the disposal .
Money borrowed form these will be consumed of sustenance.
Interest rates are very high 24-60%pa.
Customers of these instruments are born in debt, live in debt, almost
die in debt.
These constituted 91.27% of the rural credit in 1951-52.
These constituted 65% of the rural credit in 1995-96.
Though criticized amply they do provide serious help, also get
rewarded in return.
Deficit Financing Or Controlled Inflation
• Internally borrowed finance from RBI.
• Inflation will increase in the country.
• But due to scale majority of it may not realize
it. This is called “Money Illusion”.
• Initially inflation may boost the production, as
workers have to work more to earn more. But it
works only upto a certain level.
• It may lead to speculative holding of
inventories.
Foreign sources of Funds
The role of Foreign Investment:-
Why we need?
To import modern technology, heavy industry
machinery, fertilizers, fighter planes, missiles, fossil
fuels, pulses etc
Restricting the imports
Increasing exports
Obtaining loans and grants from foreigners
Observations about Exports :
1) World market conditions
2) Measures to increase productivity
3) Export surplus
Role of Foreign aid:-
Some times this ‘aid’ takes the form of
involvement.
Advantages
Disadvantages
What is good for the donors may not be
good for recipients.