Agricultural development is regarded as a prerequisite of economic development of the country. The Reserve Bank of India realizes the following basic contributions of the Agricultural sector in the overall economic development.
(i) Product contribution making available food and raw material.
(ii) Market contribution providing the market for producer goods and consumer goods produced in the none agricultural sector.
(iii) Factor contribution making available labour and capital to non-agricultural sector, and
ADVERTISEMENTS:
(iv) Foreign exchange contribution.
Being the largest industry in the country agriculture is the source of livelihood for over 70% of population in the country. On recognizing the fact that Agriculture is the foundation on which the entire super structure of the growth of industrial and other sectors of the economy has to stand, the RBI develops the Agricultural sector in the following ways :
1. Agricultural Credit Department
According to Section 54 of the RBI Act, it is required to set up a separate Agricultural Credit Department. With the formation of NABARD in 1982, all the activities of this Department have been transferred to NABARD. However, the Rural Planning and Credit Department in the Reserve Bank deals with the following agriculture related matters.
ADVERTISEMENTS:
(i) To study and identify all issues relating to Agricultural credit for policy formulations.
(ii) To provide necessary advice to the Central and State Governments, NABARD, Commercial Banks and Co-operative Banks, in the area of Agricultural Credit and priority Sector Credit.
(iii) To co-ordinate with NABARD the activities of the banking sector relating to agricultural promotion.
(iv) To prepare suitable plans to improve agricultural development in the country.
ADVERTISEMENTS:
(v) To help in the establishment of nationwide warehouse facilities for processing and market of agriculture produce, etc.
(vi) To implement and monitor special rural schemes announced by Government of India for poverty alleviation and employment generation like IRDP scemes.
(vii) To monitor and guide successful operation of Lead Bank Schemes.
(viii) To prescribe policy measures for the operations of Regional Rural Banks.
ADVERTISEMENTS:
(ix) To formulate policy for successful conduct of banking ombudsman Scheme.
(x) To assist in the formation of local area banks.
2. Funds for Agricultural Development
On the recommendations of the Rural Credit Survey Committee, the RBI Act was amended in 1955. As per the provisions of the new Act, the RBI has established two kinds of funds for the agricultural development. They are :
ADVERTISEMENTS:
(i) National Agricultural Credit (Long-term operations) Funds, and
(ii) National Agricultural Credit (stabilization) Fund.
The National Agricultural Credit (Long-term Operation) Fund was started with an initial contribution of Rs.10 crore. And, every year the RBI out of its profit has to contribute certain sum to this fund. It is used for the following purposes:
(i) Providing loans and advances to state governments for subscribing to the share capital of Co-operative Credit Institutions
ADVERTISEMENTS:
(ii) Providing medium term loans to Co-operative Banks
(iii) Providing long term loans to Central Co-operative Land Development Banks
(iv) For purchasing the debentures of Land Development Banks
The National Agricultural Credit (Stabilization) Fund is started with the initial contribution of Rs.1 crore. And every year the RBI has to contribute out of its profits certain sum to this Fund.
This fund is used to provide loans to State Co-operative Banks to convert the short-term loans (extended to rural farmers) into medium term loans during the period of natural calamities such as floods, famine, etc upon setting up the NABARD the operations on these funds were transferred to NABARD.
However RBI continued to contribute very liberally to both the funds. After the announcement of Banking Sector Reforms in 1993-94, Reserve Bank stopped contributing large sums to these funds. RBI now contributes only a token of Rs.1 crore to each of these two funds.
NABARD, however, transfers large sums out of its own profit. Further, with the establishment of NABARD, these Funds are redesignated as National Rural Credit Fund instead of Agricultural Credit Fund as advances are provided out of these Funds by NABARD for various rural developmental activities.
3. Financial Assistance to Co-operative Sector
The RBI does not provide agriculture finance directly to the farmers. It provides such financial facilities through NABARD which in turn provides financial assistance to the State Co-operative Banks so as to enable them providing credit to rural farmers.
(i) Short-term loans to State Co-operative Banks:
The short-term loans are provided to the co-operative banks for financing seasonal agricultural operations and marketing of agricultural operations and marketing of agricultural produce at a concessional rate.
It also helps the marketing societies in the form of providing working capital for purchasing, stocking and distribution of fertilizers, seeds, pesticides, etc. RBI makes available liberal finance to NABARD at concessional rate of interest for this purpose. The finance is provided through a General Line of Credit to NABARD.
(ii) Medium-Term Credit to Co-operative Banks:
With part of RBI funds, NABARD extends medium term loans for the period up to 5 years to the State Co-operative Banks for financing for land improvements, land reclamation, purchase of machinery, construction of small irrigation works, dairy farming, etc.
If natural calamities such as earthquake, floods, fire, famine etc., occur, the farmers who availed short-term loans from the co-operative banks cannot repay their loans in time. Under such circumstances, the RBI permits converting short term loans into medium-term loans. These loans are sanctioned at concessional rates.
4. Establishment of Agricultural Credit Board
In order to co-ordinate the activities of co-operative credit institutions and policies and the functions of RBI, the RBI established a permanent consultative committee in 1951. On the recommendations of the “Rural Credit Survey Committee” it was reorganized in 1956. In 1965 the committee was renamed as “Rural Co-operative Credit Consultative Committee”.
Again, in 1970 it was reorganized and renamed as “Agricultural Credit Board”. The Governor of the RBI used to be the Chairman of this Board. The Board supervised and coordinated the activities of the RBI and other agencies and ensured the adequate and timely farm credit.
5. Establishment of NABARD
The Reserve Bank of India, in consultation with the Government of India, set up a Committee to Review Arrangement for Institutional Credit for Agriculture and Rural Development (CRAFICARD) in 1979 under the chairmanship of Shri. B. Shivraman.
The CRAFICARD recommended that the NABARD be set-up. The objective was that such a national bank would be able to give undivided attention to the problems of providing production and investment credit to different rural sectors like agriculture, small scale and cottage industries and allied activities in an integrated manner. Based on this recommendation, the Government of India had setup NABARD in July 1982.
Ever since NABARD began functioning, the different functions of the Reserve Bank of India relating to agricultural finance are now performed by NABARD. The entire refinancing work for rural credit has now been transferred to NABARD. The Agricultural Refinance and Development Corporation (ARDC) have been merged with the NABARD.
The National Agricultural Credit (long-term Corporation) Fund and National Agricultural Credit (Stabilization) Fund have been transferred to NABARD.
These funds are now called National Rural Credit (Long term Operations) Fund and National Rural Credit (stabilization) Funds. Central and State Governments also contribute to the funds. The main function of NABARD is discussed below:
NABARD provides refinance to State Co-operative Banks, Regional Rural Banks, State Land Development Banks, State Government and Commercial Banks as indicated below:
Purposes
(a) Refinance for investment in agriculture and allied activities such as minor irrigation, land development, soil conservation, dairy, sheep, poultry, piggery farm, mechanization, plantation/horticulture, forestry, fishery, storage and market yards, agricultural aviation, biogas and other alternative sources of energy, sericulture, agriculture, animals and animal driven carts, agro-processing, agro services centres, compost plants, modern abattoirs, pump sets, energisation, etc.
(b) Refinance for artisans/small-scale industries/tiny sector industries, village and cottage industries, handicrafts, etc. (Non-farm Sector).
(c) Loans to State Governments for share capital contribution to co-operative institutions.
(d) Investment in share capital/securities of institutions concerned with agriculture and rural development.
Period: Available up to a maximum of 25 years.
(iv) Conversion and Rescheduling Facilities
NABARD provides refinance to eligible institutions normal SCBs and RRBs for conversion and rescheduling of loans under conditions of drought, famine or other natural calamities, military operations, enemy action, etc. Similar facilities are also available in respect of loans made to artisans, small-scale industries, etc.
(v) Financing Cottage/Villages/Small Scale Industries, etc.
All such industries located in ‘rural areas’ will be eligible for refinance from NABARD.
NABARD provides refinance for various purposes like minor irrigation, land development, farm mechanization, plantation / horticulture poultry / sheep / piggery, fisheries, dairy development, storage and marketing yields, forestry, goober gas plants, non-farm sector, IRDP, etc. About 80-82 per cent of disbursements are made for farm sector.
Loans provided to small and marginal farmers and other weaker sections of the society enjoy major share of refinance support from NABARD, nearly 80 per cent of the refinance disbursed for the purposes which are relevant for rural households. NABARD also encourages scheduled castes/tribes corporations to formulate special action plan outside. IRDP for SC/ST beneficiaries for which refinance is given under SC/ST Action Plans.
6. Assistance to Co-operative Banks in SFDA and MFAL
Small Farmers Development Agency (SFDA) and Marginal Farmers and Agricultural Labourers (MFAL): To bridge the gap between the small and big farmers, which is likely to be widened in the course of induced development, the All India Rural Credit Review Committee recommended the setting up two agencies, namely, the SFDA and the MFAL, in 1970-71.
The SFDA assists small farmers in the matter of irrigation facilities; land improvement, technical knowhow with a view to changing the farms into progressively prosperous and viable units.
Those holding between 1.25 and 2.5 acres of wet lands or 2.5 and 5 acres of garden lands are described as small farmers. Marginal farmers are those having 1.25 acres of wet lands or 2.5 acres of garden lands. Agricultural labourers comprise those having a homestead and earning 50 per cent or more of their income from agricultural labour wages.
The scheme aims at enabling these farmers to maximize production on their small holdings and to take up subsidiary occupations like poultry and sheep breeding which generate additional income. Credit will be channelized through co-operative institutions at the apex and at the primary levels. The scheme also envisages the development of co-operative marketing by linking up cultivation credit with marketing.
The NABARD used to help the co-operative banks in the project of MFAL and SFDA. By this assistance it fulfills the credit needs of economically weak farmers.
7. Reform Measures for Regional Rural Banks
The Regional Rural Banks have come a long way since their inception in 1975 and have now become an integral part of the rural financial system. As a part of financial sector reforms, the RBI along with Government of India and NABARD initiated various measures since 1994 for improving the performance and operations of Regional Rural Banks.
The noteworthy measures among them are: Removal of the condition relating to 100 per cent of landings to ‘target group’; providing investment avenues like bonds, share, units of Mutual Funds, etc. Permission to undertake fee-based services like guarantee issuance, locker-room facility, issue of drafts, etc.
The RBI subscribed to the share capital of Central and State Warehousing Corporations. This enables the corporations to establish warehouses at various places of the country. The farmers can avail loan facilities from the banks against warehouse receipts.
9. Other Facilities to Agriculture
Besides the above specific facilities, the RBI assists the Government of India and NABARD in the formulation and implementation of various schemes meant for agriculture and rural development. Such schemes include the following:
(i) Intensive agricultural district programme
(ii) Intensive agricultural area programme
(iii) High yielding varieties programme
(iv) Integrated rural development programme
(v) Community development programme
(vi) Drought prone area programme
(vii) Integrated dry land agriculture development programme, etc.
10. National Agricultural Insurance Scheme
Government of India in July 1999 introduced an Agricultural Insurance Scheme. Farmers availing of seasonal agricultural operations, loans from financial institutions/banks will be covered under the scheme compulsorily. Under the scheme risk insurance will be provided by the Government to cover farmers yield losses arising on their crops due to non- preventable risks like:
(a) Natural fire and lightening
(b) Storm, cyclftne, etc.
(c) Flood, landslide
(d) Drought, dry spells and
(e) pest/diseases, etc.
The scheme covers crops like sugarcane, potato, cotton and even pulses. The scheme will be implemented through General Insurance Corporation of India (GIC) in co-ordination with commercial banks, co-operative banks and regional rural banks. This scheme is known as “Rashtriya Krishi Bima Yojana” in Hindi.
The significance of agriculture in India arises also from the fact that the development of agriculture is an essential condition for the development of the national economy. The planned programme for agriculture in India is of recent origin. Because of the vital role played by RBI and subsequently by NABARD, the following benefits are obtained:
There is a steady increase in the area under cultivation
There is a steady rise in average yield per hectare, or rise in agricultural productivity and
As a result of an increase in the area as well as increase in yield per hectare, total production of all crops recorded a rising trend.
It is due to the continued institutional credit made available to the agricultural sector first by RBI and later by NABARD and RBI, the food grain production today crossed 200 million tonnes mark. It is estimated to be 202.5 million tonnes in 1998-99.
11. Rural Credit
As of March 2002 more than 1, 40,000 outlets for dispensing rural credit. The highest number of agency is that of the co-op bank followed by Commercial Bank (CBs). Loans disbursed by co-op. institutions towards rural credit has gone up by 42 per cent from Rs. 14,085 crore during 1997-98 to Rs. 27,080 crore during 2001-02.
However, the credit purveyed by commercial banks for agriculture and rural development was the highest at Rs. 31,964 crore during 2001-02.
As regards deposits mobilized by banks from rural areas, commercial banks topped the list with 54 per cent of total deposits.
The Reserve Bank does not provide direct finance for industrial activity. The financing of industrial activity is done by financial institutions and banks. The Reserve Bank, however, provided refinance and financial assistance to certain financial institutions and to commercial banks’ industrial landings. Presently, RBI provides refinance only towards export credit made by banks.
The Reserve Bank of India, however, plays a vital role in the field of industrial finance. The economic development in modern times has come to be associated with industrialization. The industrial growth largely depends upon the availability of financial facilities.
The money market, mainly for short-term finance provides working capital to industry and commerce, whereas, the capital market primarily for long-term finance provides block or fixed capital to business. These two markets are collectively called as market of credit.
The RBI has associated with the Government of India for the establishment of specialized financial institutions as an integral part of the capital market.
The commercial banks were neither willing nor competent to provide long-term loans to Indian Industries as bulk of their funds were in the form of short-term or demand deposits. Thus, RBI realized the need for setting up financial institutions which can specialize in offering long-term financial assistance to industry.
(a) Establishment of Institutional Framework for Industrial Finance. The RBI has played an active role in the field of Industrial Finance its most notable contribution has been in establishing a broad institutional framework to cater to the medium and long-term needs of finance to industrial sector. Some of the institutions in this category for the establishment of which the RBI was responsible are as follows:
1. Industrial Finance Corporation
2. Industrial Credit and Investment Corporation of India
3. Industrial Development Bank of India
4. State Finance Corporations
5. National Industrial Development Corporation
6. State Industrial Development and Investment Corporation
7. National Small Industries Corporation
8. Unit Trust of India
9. Industrial Reconstruction Corporation of India
10. Industrial Refinance Corporation of India
11. Credit Guarantee Scheme through Export Credit Guarantee
(b) Transfer of Loan Accounts from one Bank to Another. The RBI had laid down certain procedural guidelines/safeguards relating to the transfer of loan accounts by borrowers from one bank to another. These were issued in June, 1977 in pursuance of the recommendations contained in the reports of the Committee on Transfer of Loan Accounts appointed by the Bank.
(c) Bridge Loan. Companies approach banks for provision of bridge loans so as to expedite ongoing capital work, pending disbursal of financial assistance from All India Financial Institutions or against expected equity issues.
In November 1975, banks were advised that bridge loans could be granted to companies without prior authorization of RBI, against the committed financial assistance from the All India Financial Institutions.
However, subsequent to the submission of the Report of the Committee to review the working of the Credit Authorisation Scheme (Marathe Committee)in March 1985, it was made compulsory
(d) Prompt Settlement of Bills of Small Scale Industrial Units. With a view to ensuring prompt settlement of dues of small scale industrial units as also encouraging bills culture, banks have been advised to ensure with effect from January 1, 1998, that the corporate borrowers finance their domestic credit purchases from small scale industrial units, at least to the extent of 25 per cent by way of acceptance of bills drawn on them by the suppliers.
Banks have been advised to monitor the compliance with this requirement through the information system designed by them and charge penal interest in cases of non-compliance.
(e) Role of RBI in Rehabilitation of Sick Industrial Units. The RBI co-ordinates the effects of banks, financial institutions and government agencies in the rehabilitation of such units.
A single window concept for lending has been introduced and made mandatory by the bank in respect of fresh disbursement under working capital as also for disbursement of rehabilitation term loan and subsequent disbursement of working capital under the sanctioned credit limits to facilitate easy and quick disbursal of funds to sick/ weak industrial units at a single source.
(f) High Level Committee on Credit to SSI: The one-man committee on SSI headed by Shri S.L.Kapur, appointed by RBI to review the credit delivery system to SSIs and suggest measures for its improvement. The Committee has made in all 126 recommendations covering wide range of areas pertaining to financing of SSI sector.
The RBI examined these recommendations and advised banks to take necessary steps for immediate implementation. The more important among these are:
(i) Delegation of more powers to branch managers to grant ado limits.
(ii) Simplification of application forms
(iii) Freedom to banks to decide their own norms for assessment of credit requirements
(iv) Opening of more specialized SSI branches
(v) Enhancement in the limit for composite loans to Rs.5 lakh
(vi) Strengthening the recovery mechanism.
(g) Export Finance: One of the important areas of industrial finance is Export Credit. Export finance is a preferred finance for the Central Bank and the country because this sector earns valuable foreign exchange. Hence, the RBI continues to prescribe a preferential rate of interest on export finance.
Not only a reduced rate of interest but also exporters avail of a number of benefits against their exports like tax exemption, facility to maintain foreign currency accounts, etc. The RBI also provides refinance facility to commercial banks against their outstanding export credit.
The RBI itself does not extend any credit facility to exporters but provide indirect incentives and benefits like cheap credit, adequate credit, refinance facilities, foreign exchange accounts, etc.
As per RBI guidelines commercial banks have to extend export credit facilities to all genuine exporters. It is normally granted on the strength of Letter of credit received from overseas buyers.
Types of Credit
The credit is granted fewer than two stages.
(i) Reshipment Credit: Before shipment of goods for the purposes of procurement of raw materials, purchasing them and arranging for the transportation of goods. This type of facility is known as Reshipment finance or packing credit. It is normally extended for a maximum period of 180 days at concessional rate.
The credit can be availed of by exporters either in India Rupee or in foreign currency. However, repayment for foreign currency credit should be made in foreign currency out of export sale.
(ii) Post-Shipment Credit. This credit is extended by banks after shipment of goods. It is in the form of discounting or purchasing the bills drawn by the exporters on overseas buyers. When a customer avails of Preshipment Credit, automatically post-shipment credit will be utilised to repay the earlier credit.
Under post-shipment credit, the RBI prescribes a lower rate of interest for earliest period of export realisations-usually within 90 days of shipment. All export sales should be realised as per RBI guidelines, within 180 days of shipment.
The rate of interest on post-shipment credit increases as the period of realisation becomes longer. It is because the RBI desires to encourage those exporters who will bring in foreign exchange at the earliest.
Foreign Exchange Benefits
The RBI allows exporters to retain a part of (usually 50 per cent) the foreign exchange earned by exporters in our account known as EEFC A/c. (Exchange Earners’ Foreign Currency Account). It allows commercial banks to sell foreign exchange to exporters for various businesses including for foreign tours.
Priority Sector
Foreign banks’ advances to export sector are considered as priority sector advances. Banks are directed not to reject any export credit proposal unless such decision is taken at higher levels in the bank. The lowest rate of interest charged on export credit was 9 per cent (from August, 1998). The Reserve Bank, many a times, changes the rate depending upon general level of interest rate and export performance.
In these ways the RBI renders valuable services in the promotion of industries and commerce in India.