Rural Financing
Regional Rural Banks (RRBs)
Regional rural banks are established under the RRB Act, 1976.
The aim behind the establishment of RRBs was to take banking services to the doorsteps of the rural masses, especially in remote areas with no access to banking services. Two duties:
- To provide credit to the weaker sections of the society at concessional rate of interest who previously depended on private money lending and
- To mobilise rural savings and channel them for supporting productive activities.
Objective: develop the rural economy and create a supplementary channel to the ‘Cooperative Credit Structure’.
RRB’s ownership
The RRBs are owned by the Ministry of Finance (Government of India). These are funded jointly by the Government of India, State Governments and the sponsor of the RRB in the ratio of 50%, 15% and 35% respectively.
Difference from Commercial Banks
The RRBs mobilise deposits primarily from rural/semi-urban areas and provide loans and advances mostly to small and marginal farmers, agricultural labourers, rural artisans and other segments of the priority sector and issue Kisan Credit Cards. Any commercial bank can provide such loans RRBs’ operation is strictly regulated in the following manner:
- Area of operation: It is limited to only notified a few districts in a State.
- PSL Target: Whereas the commercial banks have to adhere to the target of 40% in Priority sector lending (PSL), the corresponding target for the RRBs is 75%.
Apart from these, the ownership structure is much different from the commercial banks, as we have discussed above.
RRBs in India
Currently, 57 RRBs are functioning in the country. In 1987, they rose to 196 when the Kelkar committee asked to stop opening new banks due to losses incurred. Since then, many of these have been amalgamated and many others closed down.
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Kisan Credit Card (KCC) |
KCC is a scheme that provides farmers with farm loans and credit for other farm and non-farm allied services. It has various advantages:
Such loans are valid for 5 years and can be taken by an individual between the ages of 18 and 75 from any commercial bank, regional rural bank or cooperative bank. NABARD monitors the Kisan Credit Card scheme for cooperative banks and RRBs. Whereas, RBI monitors it for commercial banks. |
National Bank for Agriculture and Rural Development (NABARD)
NABARD is a Statutory body formed in 1982. It is an apex body to coordinates all institutions involved in the rural financial system. It was established on the recommendations of the B. Sivaraman Committee set up by the RBI. It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of RBI, and Agricultural Refinance and Development Corporation (ARDC).
- Headquartered in Mumbaiwith branches all over India.
- Reach: “matters concerning policy, planning and operations in the field of credit for agricultureand other economic activities in rural areas in India”.
- Uplift rural India by increasing credit inflow in Agriculture + Rural Non-farm Sectors.
- NABARD is active in developing financial inclusion
- It is a member of the Alliance for Financial Inclusion
Functions undertaken by NABARD
It serves as an apex financing agency for the institutions providing investment and production credit for promoting various developmental activities in rural areas.
- Co-ordinates the rural financing activities of all institutions engaged in developmental work at the field level and maintains liaison with GoI, State Governments, RBI and other national-level institutions concerned with policy formulation
- NABARD refinances the financial institutions that finance the rural sector.
- It has Regulatory power over:
- Any institution that provides financial help to the rural economy.
- Cooperative banks and RRBs,
- It creates Human resources:
- Manages talent acquisition through IBPS CWE.
- Provides training facilities to the institutions working in the field of rural upliftment.
NABARD is also known for its ‘SHG Bank Linkage Programme’ which encourages India’s banks to lend to SHGs.
NABARD (Amendment) Act, 2017
- Increase in capital of NABARD:Under the 1981 Act, NABARD may have a capital of ₹100Cr. This capital can be further increased to ₹5,000Cr by the central government in consultation with
- The Bill allows the central government to increase this capital to ₹30,000Cr, which may be increased further by the central government in consultation with the RBI, if necessary.
- Transfer of the RBI’s share to the central government:Under the 1981 Act, the central government and RBI together must hold at least 51% of the share capital of NABARD.
- The Bill provides that the central government alone must hold at least 51% of the share capital of NABARD.
- The Bill transfers the share capital held by the RBI and valued at ₹20Cr to the central government. The central government will give an equal amount to the RBI.
- Micro, small and medium enterprises (MSME):The Bill replaces the terms ‘small-scale industry’ and ‘industry in the tiny and decentralised sector’ with the terms ‘micro enterprise’, ‘small enterprise’ and ‘medium enterprise’ as defined in the MSME Development Act, 2006.
- Previously, NABARD was responsible for providing credit and other facilities to industries having an investment of up to ₹20 lakh in machinery and plant.
- Now: The Bill extends this to apply to enterprises with investment up to:
- ₹10 crore in the manufacturing sector
- ₹5 crore in the services sector.
- Experts in the Board of Directors and Advisory Council of NABARD: Now: From MSME (instead of only Small)
- Now: Banks providing loans to MSMEs are eligible to receive financial assistance from NABARD.
- Consistency with Companies Act, 2013[Earlier Companies Act, 1956]: It deals with:
- Definition of a government company, and
- Qualifications of auditors.
Activities undertaken by NABARD
NABARD is the national implementation agency for NAPCC. All adaptation funds received by India from abroad are channelled into NABARD.
Rural Infrastructure Development Fund (RIDF):
The RIDF has been set up by the central government Within NABARD by way of deposits from Scheduled Commercial Banks operating within the country from the shortfall in their PSL Lending.
- Objective: Providing low-cost fund support to State governments for quick completion of ongoing rural projects.
- The fund has since been continued, with its allocation being announced every year in the Union Budget. ₹25,000Cr in 2017-18, same as before.
- Interest rate is linked with the bank rate. Repaid with annual instalments within 7 years.
- At present, a wide range of 36 eligible activities are financed under various sectors.
Farmers’ Clubs:
The farmers’ clubs are organised by rural branches of banks with support and financial assistance from NABARD for the mutual benefit of banks and the farmers.
- The services of NGOs, Krishi Vigyan Kendras (KVKs), Agriculture Universities (AUs), Line Departments etc., can also be availed for the purpose.
- The goal of the programme is capacity building and empowerment of the farming community and more particularly the small and Marginal farmers across rural areas.
- The organization is quite similar to others like Farmer Produce Organizations (FPOs) or cooperatives which are often created in rural areas.
NABARD’s SHG Bank Linkage Programme:
Under the SHG Bank linkage program, SHGs can borrow from banks once they have accumulated a base of their own capital and have established a track record of regular repayments.
- Advantages:
- By aggregating their individual savings into a single deposit, SHGs minimize the bank’s transaction costs and generate an attractive volume of deposits.
- Through SHGs the bank can serve small rural depositors while paying them a market rate of interest.
- It has been predominant in certain states, especially in southern regions – Andhra-Pradesh, Tamil Nadu, Kerala and Karnataka. These states accounted for 57% of the SHG credits linked during the financial year 2005–2006.
- NABARD estimates that there are 2.2 million SHGs in India, representing 33 million members, that have taken loans from banks under its linkage program to date. This does not include SHGs that have not been borrowed.
Land Development Bank (LDB):
Bank of a quasi-commercial type that provides services such as accepting deposits, making business loans, and offering basic investment products.
- Objective: to promote the development of land, and agricultureand increase agricultural production. The LDB provides long-term finance to members directly through its branches.
