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ABM502 lecture 7

Agricultural finance II

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Introduction of Lead Bank Scheme

Lead Bank Scheme (LBS) was introduced in1969, based on the recommendations of the

Gadgil Study Group. The basic idea was to have

an area approach for targeted and focused

banking.

The bankers committee, headed by F. S.

Nariman, concluded that districts would be the

units for area approach and each district

could be allotted to a particular bank which

will perform the role of a Lead Bank.

2009-2013 http://www.gktoday.in

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Lead Bank Scheme The RBI evolved Lead Bank Scheme with the

following major objectives:

To identify suitable areas for branch expansion

To formulate a phased program for expanding the

branches to provide banking facilities to the areacovered

To design financing scheme, which can help inmobilizing deposit and promoting investment

among the local people. To earmark potential areas for promoting

schemes for agricultural development and smallscale industries, generating local

entrepreneurship.

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Structure of lead bank scheme

Allotment of districts:

All the districts in the country except the

metropolitan cities of Mumbai, Kolkata, Chennai

and Union Territories of Chandigarh, Delhi andGoa were allotted among public sector banks and

a few private sector banks. Later on, the Union

Territories of Goa, Daman and Diu as also the

rural areas of the Union Territories of Delhi andChandigarh have been brought within the purview

of LBS.

2009-2013 http://www.gktoday.in

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District Consultative Committees (DCCs) The nextimportant development in the history of LBS was theconstitution of DCCs in all the districts, in the earlyseventies to facilitate co-ordination of activities of all

the Banks and the financial institutions on the onehand and Government departments on the other. TheDCCs were constituted in the lead districts during197173.

District credit plan (DCP) The second and mostimportant phase of the LBS was formulation of DCPsand their implementation. Although certain structuralcredit gaps were identified earlier, positive measureswere introduced only after nationalization of thebanks. Certain sectors which were hitherto neglectedwere given a priority status and banks were asked toprovide credit to these sectors in a more concertedway.

2009-2013 http://www.gktoday.in

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Problems with Lead Bank Scheme

Organizational problems

Lack of coordination

Apathetic attitude of bank officials

Marketing and extension problems

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Village adoption scheme (VAS): Under this,

bank adopted some villages in their command

area for intensive lending. The area approach

was not so much aimed at development of a

chosen area as for avoiding the pitfalls of

scattered and unsupervised lending. In the initial

stages of VAS, RBI had encouraged banks to

adopt villages as well as to avoid scatteredlending.

2009-2013 http://www.gktoday.in

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Genesis of Regional Rural Banks:

Nationalisation of banks was not able to bridge theentire credit gap in the rural areas.

A vast majority of the small and marginal farmersand rural artisans remained untouched by thebanking system.

Therefore, the range of institutional alternatives waswidened in 1975 by adding Regional Rural Banks(RRBs) to the banking scene which wouldexclusively cater to the credit demands of the

hitherto neglected segment of the rural economy. Thus, with Co-operatives. Commercial Banks and

RRBs, a multi-agency approach was adopted inthe rural credit system.

2009-2013 http://www.gktoday.in

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Multi agency approach- objectives &

advantages

Objectives: To establish close and continuous connection with

members

To encourage constant consultation between membersand the society so that welfare of both may be achieved.

Advantages:

In case one agency fails, other agency can easily stepinto meet credit requirements

Different agencies can overcome different types of

demand for farmers Banks are better equipped to formulate area-specific

projects and finance, which is very helpful in areadevelopment

Banks with their huge resources can finance big

advance, required for land development

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Problems in multi agency

approach

Problems of recovery since more than oneinstitutional agency may have legally established

chair on same security

Problems of overlapping and duplication of bank

facilities, and consequent wasteful expenditure

Problems arising out of different systems,

procedures, policies, security norms etc.

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NABARD- role and functions

Providing refinance to lending institutions in rural areas

Bringing about or promoting institutional development and Evaluating, monitoring and inspecting the client banks

Besides this pivotal role, NABARD also:

Acts as a coordinator in the operations of rural credit

institutions

Extends assistance to the government, the Reserve Bank

of India and other organizations in matters relating to rural

development

Offers training and research facilities for banks,cooperatives and organizations working in the field of

rural development

Helps the state governments in reaching their targets of

providing assistance to eligible institutions in agriculture

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Mission of NABARD

Promoting sustainable and equitable agriculture and rural

development through effective credit support, relatedservices, institution building and other innovativeinitiatives. In pursuing this mission, NABARD focuses itsactivities on:

Credi t funct ion s :involving preparation of potential-linkedcredit plans annually for all districts of the country foridentification of credit potential, monitoring the flow ofground level rural credit, issuing policy and operationalguidelines to rural financing institutions and providingcredit facilities to eligible institutions under variousprogrammes.

Development funct ions : concerning reinforcement ofthe credit functions and making credit more productive.

Superv isory funct ions :ensuring the proper functioning

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Micro Credit

In general, it is associated with Very small loans

No collateral

Borrowers from among the rural poor

Loans for income generation through market based

self employment

The formation of borrower groups

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Micro Credit

It is designed not only to supportentrepreneurship and alleviate poverty, but also in

many cases to empower women and uplift entire

communities by extension. In many communities,

women lack the highly stable employmenthistories that traditional lenders tend to require.

Many are illiterate, and therefore unable to

complete paperwork required to get conventional

loans

Source: Wikipedia

(http://en.wikipedia.org/wiki/Microcredit)

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Constraints hindering growth of micro

credit organizations

Not all the executive staff of the micro creditorganizations has the passion necessary to set andbuild goals

Targeting the poorest of the poor is a difficult task, asthere are no specific criteria for identifying the same,hence credit may get drifted

Micro finance will become unsuccessful if there is toomuch reliance on grants and subsidized funding. Asuccessful micro finance need business plan, clear

goals, proper strategies to keep their organizationshealthy.

MFI should have strategy for resource mobilizationwhich is at most necessity in initial stages.

Unavailability of technical staffs skilled in providingfinance services to the poor.

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Assignment 3

Write up on Microfinance