Developing Rural Finance in India Essay

1. Abstract: Rural Finance is about providing financial services for people living in rural areas. It comprises credit, savings and insurance in rural areas, whether provided through formal or informal mechanisms. Financial Development can exert a significant influence on the distribution of Income. In this paper, using Indian rural financial programs implemented by various financial institutions like NABARD, IFAD, SHC, etc. we investigated the various reforms / developments in Indian rural financial system.

The investigation shows that, despite positive economic development in India in recent years, the number of people living below the poverty line has decreased only slightly. 2. Keywords: Credit, Savings, Insurance, Rural Finance, Financial Development, Micro finance, Agricultural Credit, Gross Domestic Product, Economy, Nabard, Acronym: NABARD: IFAD: SDC: RBI: RRB: SIDBI: National Bank for Agricultural and Rural Development International Fund for Agriculture Development Swiss agency for development and Cooperation Reserve Bank of India Regional Rural Banks Small Industries Development Bank of India . Objective of Study: The main objective is to study importance of developing rural financial systems. To study the impact of various programmes and schemes implemented by Government as well as Non government bodies across rural areas, for financial development. 2 4. Hypothesis: The Rural sector is one of the pillars to the overall economic development of India through its agricultural and non agricultural subsectors. However this sector has suffered adversely from misdirected policies of government.

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The importance of rural sector in Indian economy cannot be undermined. The government has taken many initiatives in the field of rural development. But the moot question is: Have these steps proven enough? The study has observed that the Government policy has created a `financial climate’ that is not conducive to lending in general, and to rural banking in particular. Despite government’s efforts over last 62 years, rural development in India has not as it was envisaged.

Considering the vital importance of this sector to our economy, there is an urgent need for shift in the overall strategy for rural development. Therefore there is need to re-focus the policies toward this sector, encouraging financial institutions, NGOs and providing adequate, affordable & timely financial services in this endeavor of developing rural financial system. 5. Introduction: An understanding of rural finance helps explain the livelihood strategies and priorities of the rural poor.

Rural finance is important to the poor. The poorest groups spend the highest proportion of their income on food – typically more than 60% and sometimes as much as 90%. Under these circumstances, any drop in earnings, or any additional expenditure (health or funeral costs, for instance) has immediate consequences for family welfare – unless savings or loans can be accessed. Financial transactions are therefore an integral part of the livelihood system of the poor.

A growing body of literature on rural financial development has shown that access to credit and savings services is an essential safeguard for low income households against the risk of slipping into poverty. While there is a numerically strong infrastructure of formal financial institutions in rural India, they often lack the capacity to provide adequate demand-oriented financial services. Structural obstacles hamper the sustainable development of the financial system in India. 3 We examine the impact of financial development on income inequality in rural India.

The rest of this paper is organized as follows. The next section provides a brief theoretical review on Developing Rural Financial System. Section 7A focuses importance of developing rural finance. Section 7B focuses financial institution deploying various schemes and policies for developing rural financial system. Finally this paper concludes with section 8. 6. Literature Review: India’s Former Finance Minister Palaniappan Chidambaram put agriculture at the center of India’s latest budget. “Everything else can wait, but not agriculture. Chidambaram admits that his government’s true challenge is not only to come up with the right policies and programs but “to deliver the intended outcomes” in Budget 2007. According to an analysis done for ET by Rajesh Shukla, senior fellow at the National Council of Applied Economic Research (NCAER), the combined share of industry and services in rural GDP has risen to 58. 4% in the current fiscal from 48. 6% in 1999-2000 on the back of strong growth in these sectors in the past five years while the share of agriculture slipped to 41. %. The contribution of industry, the most robust of all rural sectors, to the rural economy is 30. 2% in the current fiscal year while services account for 28. 2%. Mukul G Asher, Professor of Public policy and Azad Bali an instructor at Lee Kuan Yew School of the public Policy, national University of Singapore By early February 2009, the center had released just 59% of the funds allocated for 2008-09 under the Rashtriya Krishi Vikas Yojana (RKVY) and 57% of the funds granted under the National Food Security Mission (NFSM).

This reflects poorly on the priorities of the UPA Government. Credit Analysis & Research Ltd. (CARE) in its newsletter published None of the sectors (except mining and quarrying) managed to remain immune from the lag effects of the tightening monetary policy during FY08 and global and 4 domestic economic slump. Agriculture sector – having share of 17 per cent in the overall GDP, is estimated to grow at 2. per cent during FY09 as compared to 4. 9 per cent in FY08. Imon Ghosh a Corporate Trainer, Speaker, Economist and Author in his paper “Reducing Rural Poverty and Accelerating India’s Economic Growth” says The modern banking system has failed to deliver inexpensive credit to India’s 580,000 villages – despite several expensive attempts to do so. Do we need to rethink the appropriate institutional structure for rural banking in India?

However, the rural economy’s development potential – and with it, the growth prospects of the entire Indian economy – are not going to be achieved without the availability of (a) affordable credit, (b) in adequate quantities (c) at the right time. Prof. Michael Todaro, an American economist and pioneer in the field of transportation economics and Economic Development observes in his landmark text on Development Economics that the problems of widespread poverty, growing inequality, rapid population growth and rising unemployment all find their origins in the stagnation of economic life in rural areas.

There can be no national development without rural development 7. Main Body of Research Paper: A. Rural finance: Financial services offered and used in rural areas by farm and non-farm population of all income levels through a variety of formal, informal and semiformal institutional arrangements and diverse type of products and services, such as loans, deposits, insurance, and remittances. Rural finance includes agriculture finance and microfinance and is a sub sector of the larger financial sector.

Agricultural finance: sub-set of rural finance dedicated to financing agriculture-related activities, such as input supply, production, distribution and wholesaling, and marketing. 5 Microfinance: financial services (savings, credit, payment transfers, insurance) for the poor and low-income people. Importance of Developing Rural Finance: Finance is still the biggest problem for development of rural economy despite it being innovative. People in the rural areas have no money and often tend to go for high-cost borrowings from non institutional sources like Money lender.

No venture capitalists or funders have ever come forward to help those communities with social obligations in mind, who lends the money to those poor people without collateral securities despite having the entrepreneurial capabilities, innovativeness, creativeness and hard working abilities. Agriculture represents much more to India than a mere slice of economic pie – it is the very lifeblood of the country, the source of livelihood for 115 million farming families and 60 percent of the country’s rural population, the base upon which the entire edifice of the nation rises.

Hence rural development can not be neglected. Agriculture in India occupies a prime position in terms of its contribution to gross domestic product and factor incomes. However, from last decade Indian economy evidenced the decreased contribution to GDP from the sector of agriculture. With annual growth in manufacturing and in services each topping 11 percent, agriculture’s 2. 3 percent growth rate lags stubbornly behind the 4 percent target, India must hit if it is to push overall growth – now at 9. 6 percent – into double digits1.

The government’s challenge is to implement policies that promote growth but also provide relief to India’s stressed small-scale farmers, or else the country will have to reckon with much more than a missed growth target. India, long one of the most productive agricultural regions of the world, could not meet its basic need for food grains during the early years of the nation’s independence. The Green Revolution of the 1960s and 1970s dramatically improved yields in India. With considerable national pride, India boasted that it had achieved not only self-sufficiency in food grains, but had become a grain-exporting nation.

In 2006, however, for the first time since the 6 Green Revolution, and in part because of changes in agricultural policy, India will again have to import food grains. The share of agriculture in GDP falling continuously2 In India, numerous government schemes have tried to provide various subsidized services to the poor households. However, various studies have exposed the limitation of these programs, showing the lack of access of mainstream financial services for these poor households and their overdependence on the local moneylenders in meeting their consumption and microenterprise demands.

Despite having a wide network or rural bank branches in the country and implementation of many credit linked poverty alleviation programmes, a large number of the very poor continue to remain outside the fold of the formal banking system. Various studies also suggested that the policies, systems and procedures and the saving and loan products often did not meet the needs of the very poor. 1. Source: Budget 2007 2. Chart Source: Edelweiss Research (Edelweiss Securities Ltd). 7

The decreasing contribution of agriculture to GDP Source: The Economics Times, 19/02/2009 B. I. Rural finance comes in three major forms: Informal financial institutions which are not regulated by banking sector such as rotating and savings groups, church groups or similar groupings of people II. Semi formal institutions which are not regulated by banking sector but are usually licensed and supervised by another government agency such as self help groups, NGOs involved in provision of financial services and icrofinance organizations (in some instances). III. Formal institutions which are subject to banking regulations and supervision such as microfinance institutions, banks. In order to enhance the quality of rural livelihoods a more holistic approach to development is needed. 8 According to above classification the major players which were instrumental in the growth of rural finance industry in India including Government Departments as well as Non Government Organizations.

NABARD, SIDBI, IFAD, SDC, SHG, Pahal NABARD (National Bank for Agriculture and Rural Development), fully owned by Government of India and RBI, was established in 1982. It is a pioneer in microfinance programs in India. NABARD is the Apex Development Bank with a mandate to facilitate credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. This essentially means happiness and prosperity for rural India leading to overall well being of the nation.

NABARD is entrusted with Providing refinance to lending institutions in rural areas, Bringing about or promoting institutional development, Evaluating, monitoring and inspecting the client banks Policies, planning and operations in the field of credit for agriculture and for other economic developmental activities in rural areas With a capital base of Rs 2,000 crores, it operates through its head office at Mumbai, 28 regional offices situated in state capitals and 391 district offices at districts.

Rural Financial System Development Programme, January 2005 to December 2012 Department of Rural Development in India: It is a department under the Ministry of Rural Development in the Central Government of India. The Department facilitates the provision of several services such as training and research facilities, human resource development, institutes of Panchayati Raj, and at the same time provides functional assistance to the DRDA (District Rural Development Agency). Department of Rural Development xecutes the schemes for wage employment and self-employment generation and, for providing small irrigation and housing facilities to the rural poor, provide economic aid to the poor in rural areas, basic minimum services. The schemes undertaken by the department for Rural Development in India are; 9 Pradhan Mantri Gram Sadak Yojana (PMGSY): The transportation facility in the rural areas is one of the important factors for the economic growth of the rural sector. The construction of the transportation facilities would also help the rural unskilled labor. This scheme is launched and fully sponsored by the Central Government of India.

Swarnjayanti Gram Swarozgar Yojana (SGSY): This program is a single self-employment program for the poor rural people from the year 1999. This program was implemented as a total package encompassing all the characteristics of self employment such as proper training, development of infrastructure, planning of activities, financial aid by the means of credit from banks, organizing the poor people in the rural areas into Self Help Groups, marketing support and subsidies. Sampoorna Gramin Rozgar Yojana (SGRY): The scheme was put to effect with the merger of the Jawahar Gram Samridhi Yojana and Employment Assurance Scheme in the year of 2001.

The Central and State governments at 75:25 ratios are sharing the execution cost of the scheme. The scheme aims at increasing the food protection by the means of wage employment in the rural areas. Indira Awaas Yojana (Rural Housing): This scheme was put to effect in the year 1996. With the declaration of the new National Housing and Habitat policy by the Government of India in year 1998, which stated ‘housing for all’, the authorities are putting emphasis on providing housing benefits all over the rural areas in the country for below poverty level.

IFAD (International Funds for Agricultural Development): The International Fund for Agricultural Development (IFAD), a specialized agency of the United Nations, was established as an international financial institution in 1977 to finance agricultural development projects primarily for food production in the developing countries. Working with rural poor people, governments, donors, non-governmental organizations and many other partners, 10 IFAD focuses on country-specific solutions, which can involve increasing rural poor peoples’ access to financial services, markets, technology, land and other natural resources.

IFAD programmes focus on the following areas: Agricultural development, financial services, Fisheries, Capacity-and institutionbuilding, Storage/food-processing/marketing, Research/extension/training, Small and medium scale enterprise development IFAD will ensure that poor rural people have better access to, and the skills and organization they need to take advantage of: Natural resources, especially secure access to land and water, and improved natural resource management and conservation practices Improved agricultural technologies and effective production services A broad range of financial services Transparent and competitive markets for agricultural inputs and produce.

Opportunities for rural off-farm employment and enterprise development Local and national policy and programming processes Small Industries Development Bank of India (SIDBI) SIDBI is implementing a World Bank-led multi agency / multi activity Project on Financing and Development of SMEs. While SIDBI has been assigned with the responsibility of implementing the project, the Banking Division, Ministry of Finance, Government of India is the nodal agency for the same. It was established in April 1990 under an Act of Indian Parliament as the principal financial institution for Promotion, Financing, Development of industry in the small scale sector, coordinating the functions of other institutions engaged in similar activities.

SIDBI Foundation for Micro Credit (SFMC) was launched by the Bank in January 1999 for channelizing funds to the poor in line with the success of pilot phase of Micro Credit Scheme. SFMC’s mission is to create a national network of strong, viable and sustainable Micro Finance Institutions (MFIs) from the informal and formal financial sector to provide micro finance services to the poor, especially women. 11 SFMC is the apex wholesaler for micro finance in India providing a complete range of financial and non-financial services such as loan funds, grant support, equity and institution building support to the retailing Micro Finance Institutions (MFIs) so as to facilitate their development into financially sustainable entities, besides developing a network of service providers for the sector.

SFMC is also playing significant role in advocating appropriate policies and regulations and to act as a platform for exchange of information across the sector. The launch of SFMC by SIDBI has been with a clear focus and strategy to make it as the main purveyor of micro finance in the country. Operations of SFMC in the next few years, is not only expected to contribute significantly towards development of a more formal, extensive and effective micro finance sector serving the poor in India but also ensure sustainability at all levels viz. at the apex level (SFMC), at the MFI level and at the client level to ensure continuance of such arrangement.

Most importantly, SFMC has strived to create a mechanism in which there should be no barriers to growth. Under the dispensation, there is a focus on innovation and action research. RRB: Regional Rural Banks Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country. SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is 2349 (16%).

Regional Rural Banks (RRBs) have emerged as the third arm for delivering rural credit, and the sponsor banks have assured me that RRBs are willing to take on greater responsibilities. SDC: Swiss agency for development and Cooperation SDC has been involved in Rural Finance and Employment activities in India and is in the process of consolidating its successful activities in this sector. 12 Easy availability of credit and other financial products remains essential for the poor to sustain their agriculture, increase productivity and for generation of employment in rural areas. SDC partners with para-Statal and private organizations to innovate develop and extend financial services to the poorest.

Starting in 1963 with a technical collaboration in milk production, SDC’s partnership with India’s development agenda has developed into a diverse set of engagements covering natural resource management, rural finance and livelihoods, decentralisation of power, empowerment of the discriminated, environment and pollution, humanitarian assistance as well as the human and institutional development of the development sector. PAHAL is a voluntary Non Government Organization working in the field of social welfare, Rural & Slum area Sustainable Development, Environment Protection with the tool of Self Reliance, Micro Saving, Micro-Financing, Capacity Building of needy people specially women, Awareness Programs, Co-operation & Co ordination. PAHAL a non- Govt. rganization was established in 1988, with the object of Social Welfare, Environment Protection & Rural Development PAHAL is using SHG tool of Micro Saving & Micro Financing and has formed more than 387 NABARD Sponsored Self Help Groups. (Highest in Uttrakhand) From1994 to 2007 Are the Financial Services/ Programmes are effective enough? NABARD refinances the microfinance sector loans by banks, but doesn’t undertake direct financing. Thus, its ability to promote innovations or establish any “missing link” units is very limited. Small Industries Development Bank of India (SIDBI) mainly uses the network of State Financial Corporations (SFCs) and commercial banks to extend microfinance sector loans in rural small towns.

It also faces the same constraint. State Financial Corporations (SFCs) largely concentrate on the upper end of SSIs and that too in urban areas. However, through their district branches, a small proportion of lending is done to the microfinance sector. Their lengthy and stringent procedures inhibit the poor. Regional Rural Banks (RRBs) are located in rural areas, but are suffering 13 immensely from lack of skills, incentives and infrastructure support. As can be seen from above, while there is no dearth of institutions and branch network in urban and rural areas, this physical outreach does not translate into access to credit by microfinance sector producers.

Despite Finance Minister, in his Budget Speech for FY07 and FY08, announced a Debt Waiver and Debt Relief Scheme for farmers which came in to immediate force, but still Indian farmers suicide were evidenced. 8. Conclusion/Findings: Rural development is one of the pillar on which future of the economy stands. Most of the rural development programmes undertaken thus far have lacked focus and seem to be misdirected, though some of the programmes have yielded exceptionally high economic and social returns. Even though there are so many organizations which working on development of rural are, but still rural area of India is lagging below the poverty line. This is due to the rural people are not aware about the olicies which has been implemented by the Government & other Financial Institution which mainly work for rural development. The crisis of India’s farmers has the potential to derail the country’s exceptional economic growth Government need to design and implement agriculture friendly polices that will encourage the development of financial sector and market oriented enterprises. Governments and donors need to invest into human and institutional development in rural areas. 9. Recommendations: There should be proper channelized implementation of the services Affordable credit, in adequate quantities and at the right time should be made available to rural poor 14

There is a need once again to bring in Green Revolution as agro products contribution shows downtrend in GDP The books of account of every lending institution that has granted debt waiver or debt relief under this Scheme shall be subject to an audit in accordance with the procedure that may be prescribed by RBI/NABARD. There shall be strict National Level Monitoring Committee to control and assure the proper availability of the fund s to poor. Working of the Bodies should be free from political hassles and its corruption. 15 References: Budget speech of Former Finance Minister P Chidambaram’s Budget 2008-09 Interim Budget 2009-10 The Economics Times Economic Survey 2003 Yale Global publication of the Yale Center for the Study of Globalization. Websites: www. ruralfinance. org www. ifad. org/ruralfinance www. nabard. org www. sidbi. com www. rural. nic. in 16


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