Development bank in india

Anjali shah development banking in India.
MEANING:MEANING:
The nameThe name bankbank derives from thederives from the ItalianItalian wordword bancobanco,, deskdesk,, used duringused during
thethe RenaissanceRenaissance byby FlorentinesFlorentines bankers, who used to make their transactionsbankers, who used to make their transactions
above a desk covered by a green tableclothabove a desk covered by a green tablecloth
AA bankbank is a commercial or state institution that providesis a commercial or state institution that provides financialfinancial
servicesservices, including issuing money in various forms, receiving, including issuing money in various forms, receiving depositsdeposits ofof
money, lending money and processing transactions and the creating of credit. Amoney, lending money and processing transactions and the creating of credit. A
commercial bankcommercial bank accepts deposits from customers and in turn makesaccepts deposits from customers and in turn makes loansloans,,
even in excess of the deposits. Some banks (called Banks of issue) issueeven in excess of the deposits. Some banks (called Banks of issue) issue
banknotesbanknotes as legal tender. Many banks offer ancillaryas legal tender. Many banks offer ancillary financial servicesfinancial services to maketo make
additional profit; for example, most banks also rentadditional profit; for example, most banks also rent safe deposit boxessafe deposit boxes in theirin their
branches.branches.
Currently in most jurisdictions commercial banks are regulated andCurrently in most jurisdictions commercial banks are regulated and
require permission to operate. Operational authority is granted by bank arequire permission to operate. Operational authority is granted by bank a
regulatory authority that provides rights to conduct the most fundamentalregulatory authority that provides rights to conduct the most fundamental
banking services such as accepting deposits and making loans. A commercialbanking services such as accepting deposits and making loans. A commercial
bank is usually defined as an institution that both accepts deposits and makesbank is usually defined as an institution that both accepts deposits and makes
loans; there are also financial institutions that provide selected banking servicesloans; there are also financial institutions that provide selected banking services
without meeting the legal definition of a bank. Banks have influencedwithout meeting the legal definition of a bank. Banks have influenced
economies and politics for centuries. Historically, the primary purpose of aeconomies and politics for centuries. Historically, the primary purpose of a
bank was to provide loans to trading companies. Banks provided funds to allowbank was to provide loans to trading companies. Banks provided funds to allow
businesses to purchase inventory, and collected those funds back with interestbusinesses to purchase inventory, and collected those funds back with interest
when the goods were sold. For centuries, the banking industry only dealt withwhen the goods were sold. For centuries, the banking industry only dealt with
businesses, not consumers. Commercial lending today is a very intense activity,businesses, not consumers. Commercial lending today is a very intense activity,
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with banks carefully analysing the financial condition of their business clientswith banks carefully analysing the financial condition of their business clients
to determine the level of risk in each loan transaction. Banking services haveto determine the level of risk in each loan transaction. Banking services have
expanded to include services directed at individuals, and risks in these muchexpanded to include services directed at individuals, and risks in these much
smaller transactions are pooled.smaller transactions are pooled.
A bank generates a profit from the differential between the level ofA bank generates a profit from the differential between the level of
interest it pays for deposits and other sources of funds, and the level of interestinterest it pays for deposits and other sources of funds, and the level of interest
it charges in its lending activities. This difference is referred to as theit charges in its lending activities. This difference is referred to as the spreadspread
between the cost of funds and the loan interest rate. Historically, profitabilitybetween the cost of funds and the loan interest rate. Historically, profitability
from lending activities has been cyclic and dependent on the needs andfrom lending activities has been cyclic and dependent on the needs and
strengths of loan customers. In recent history, investors have demanded a morestrengths of loan customers. In recent history, investors have demanded a more
stable revenue stream and banks have therefore placed more emphasis onstable revenue stream and banks have therefore placed more emphasis on
transaction fees, primarily loan fees but also including service charges on arraytransaction fees, primarily loan fees but also including service charges on array
of deposit activities and ancillary services (international banking, foreignof deposit activities and ancillary services (international banking, foreign
exchange, insurance, investments, wire transfers, etc.). However, lendingexchange, insurance, investments, wire transfers, etc.). However, lending
activities still provide the bulk of a commercial bank's income.activities still provide the bulk of a commercial bank's income.
CURRENT SCENAREO:CURRENT SCENAREO:
Currently (Currently (20072007), overall, banking in India is considered as fairly mature), overall, banking in India is considered as fairly mature
in terms of supply, product range and reach-even though reach in rural Indiain terms of supply, product range and reach-even though reach in rural India
still remains a challenge for the private sector and foreign banks. Even in termsstill remains a challenge for the private sector and foreign banks. Even in terms
of quality of assets and capital adequacy, Indian banks are considered to haveof quality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets-as compared to other banks inclean, strong and transparent balance sheets-as compared to other banks in
comparable economies in its region. The Reserve Bank of India is ancomparable economies in its region. The Reserve Bank of India is an
autonomous body, with minimal pressure from the government. The statedautonomous body, with minimal pressure from the government. The stated
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policy of the Bank on the Indian Rupee is to manage volatility-without anypolicy of the Bank on the Indian Rupee is to manage volatility-without any
stated exchange rate-and this has mostly been true.stated exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite someWith the growth in the Indian economy expected to be strong for quite some
time-especially in its services sector, the demand for banking services-time-especially in its services sector, the demand for banking services-
especially retail banking, mortgages and investment services are expected to beespecially retail banking, mortgages and investment services are expected to be
strong. M&As, takeovers, asset sales and much more action (as it is unravelingstrong. M&As, takeovers, asset sales and much more action (as it is unraveling
in China) will happen on this front in India.in China) will happen on this front in India.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increaseIn March 2006, the Reserve Bank of India allowed Warburg Pincus to increase
its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is theits stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the
first time an investor has been allowed to hold more than 5% in a private sectorfirst time an investor has been allowed to hold more than 5% in a private sector
bank since the RBI announced norms in 2005 that any stake exceeding 5% inbank since the RBI announced norms in 2005 that any stake exceeding 5% in
the private sector banks would need to be vetted by them.the private sector banks would need to be vetted by them.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sectorCurrently, India has 88 scheduled commercial banks (SCBs) - 28 public sector
banks (that is with thebanks (that is with the Government of IndiaGovernment of India holding a stake), 29 private banksholding a stake), 29 private banks
(these do not have government stake; they may be publicly listed and traded on(these do not have government stake; they may be publicly listed and traded on
stock exchanges) and 31 foreign banks. They have a combined network of overstock exchanges) and 31 foreign banks. They have a combined network of over
53,000 branches and 17,00053,000 branches and 17,000 ATMsATMs. According to a report by ICRA Limited, a. According to a report by ICRA Limited, a
rating agency, the public sector banks hold over 75 percent of total assets of therating agency, the public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2% andbanking industry, with the private and foreign banks holding 18.2% and 6.5%6.5%
respectively.respectively.
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BANKING SERVICES IN INDIA:BANKING SERVICES IN INDIA:
With years, banks are adding services to theirWith years, banks are adding services to their
customers. The Indian banking industry is passingcustomers. The Indian banking industry is passing
through a phase of customers market. The customers havethrough a phase of customers market. The customers have
more choices in choosing their banks. A competition hasmore choices in choosing their banks. A competition has
been established within the banks operating in India.been established within the banks operating in India.
With stiff competition and advancement of technology, the services provided byWith stiff competition and advancement of technology, the services provided by
banks have become more easy and convenient. The past days are witness to anbanks have become more easy and convenient. The past days are witness to an
hour wait before withdrawing cash from accounts or a cheque from north ofhour wait before withdrawing cash from accounts or a cheque from north of
country being cleared in one month in the south.country being cleared in one month in the south.
This section of banking deals with the latest discovery in the bankingThis section of banking deals with the latest discovery in the banking
instruments along with polished version of their old systems.instruments along with polished version of their old systems.
A bank is a business which provides financial services for profit.A bank is a business which provides financial services for profit.
Traditional banking services include receiving deposits of money, lendingTraditional banking services include receiving deposits of money, lending
money and processing transactions. Some banks (called Banks of issue) issuemoney and processing transactions. Some banks (called Banks of issue) issue
banknotes as legal tender. Many banks offer ancillary financial services to makebanknotes as legal tender. Many banks offer ancillary financial services to make
additional profit; for example: selling insurance products, investment products,additional profit; for example: selling insurance products, investment products,
or stock broking.or stock broking.
Currently in most jurisdictions the business of banking is regulated andCurrently in most jurisdictions the business of banking is regulated and
banks require permission to trade. Authorization to trade is granted by bankbanks require permission to trade. Authorization to trade is granted by bank
regulatory authorities and provides rights to conduct the most fundamentalregulatory authorities and provides rights to conduct the most fundamental
banking services such as accepting deposits and making loans. There are alsobanking services such as accepting deposits and making loans. There are also
financial institutions that provide banking services without meeting the legalfinancial institutions that provide banking services without meeting the legal
definition of a bank.definition of a bank.
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BANKING IN INDIA:BANKING IN INDIA:
Banking in IndiaBanking in India originated in the firstoriginated in the first
decade ofdecade of 18th century18th century with The General Bank ofwith The General Bank of
India coming into existence inIndia coming into existence in 17861786. This was. This was
followed by Bank of Hindustan. Both thesefollowed by Bank of Hindustan. Both these
banks are now defunct. The oldest bank inbanks are now defunct. The oldest bank in
existence in India is theexistence in India is the State Bank of IndiaState Bank of India being established as "The Bank ofbeing established as "The Bank of
Bengal" inBengal" in CalcuttaCalcutta in Junein June 18061806. At that point of time, Calcutta was the most. At that point of time, Calcutta was the most
active trading port, mainly due to the trade of theactive trading port, mainly due to the trade of the British EmpireBritish Empire, and due to, and due to
which banking activity took roots there and prospered. The first fully Indianwhich banking activity took roots there and prospered. The first fully Indian
owned bank was theowned bank was the Allahabad BankAllahabad Bank, which was established in, which was established in 18651865.By the.By the
1900s1900s, the market expanded with the establishment of banks such as, the market expanded with the establishment of banks such as PunjabPunjab
National BankNational Bank, in 1895 in Lahore and, in 1895 in Lahore and Bank of IndiaBank of India, in, in 19061906, in, in MumbaiMumbai - both- both
of which were founded under private ownership. Theof which were founded under private ownership. The Reserve Bank of IndiaReserve Bank of India
formally took on the responsibility of regulating the Indian banking sector fromformally took on the responsibility of regulating the Indian banking sector from
19351935. After India's independence in. After India's independence in 19471947, the Reserve Bank was nationalized, the Reserve Bank was nationalized
and given broader powers.and given broader powers.
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OVERVIEW OF DEVELOPMENT BANKING IN INDIA:OVERVIEW OF DEVELOPMENT BANKING IN INDIA:
The concept of developmentThe concept of development
banking rose only after Second Worldbanking rose only after Second World
War, Successive of the Great DepressionWar, Successive of the Great Depression
in 1930s. The demand for reconstructionin 1930s. The demand for reconstruction
funds for the affected nations compelledfunds for the affected nations compelled
in setting up worldwide institution forin setting up worldwide institution for
reconstructions. As a result the IBRDreconstructions. As a result the IBRD
was set up in 1945 as a worldwidewas set up in 1945 as a worldwide
institution for development andinstitution for development and
reconstruction. This concept has been widened all over the world and resultedreconstruction. This concept has been widened all over the world and resulted
in setting up of large number of banks around the world which coordinating thein setting up of large number of banks around the world which coordinating the
developmental activities of different nations with different objectives among thedevelopmental activities of different nations with different objectives among the
world.world.
The course of development of financial institutions and markets duringThe course of development of financial institutions and markets during
the post-Independence period was largely guided by the process of plannedthe post-Independence period was largely guided by the process of planned
development pursued in India with emphasis on mobilization of savings anddevelopment pursued in India with emphasis on mobilization of savings and
canalizing investment to meet Plan priorities. At the time of Independence incanalizing investment to meet Plan priorities. At the time of Independence in
1947, India had a fairly well-developed banking system. The adoption of bank1947, India had a fairly well-developed banking system. The adoption of bank
dominated financial development strategy was aimed at meeting the sectoraldominated financial development strategy was aimed at meeting the sectoral
credit needs, particularly of agriculture and industry. Towards this end, thecredit needs, particularly of agriculture and industry. Towards this end, the
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Reserve BankReserve Bank concentrated on regulating and developing mechanismsconcentrated on regulating and developing mechanisms
for institution building. The commercial banking network was expanded tofor institution building. The commercial banking network was expanded to
cater to the requirements of general banking and for meeting the short-termcater to the requirements of general banking and for meeting the short-term
working capital requirements of industry and agriculture. Specializedworking capital requirements of industry and agriculture. Specialized
development financial institutions (DFIs) such as thedevelopment financial institutions (DFIs) such as the IDBI, NABARD, NHBIDBI, NABARD, NHB
and SIDBIand SIDBI, etc., with majority ownership of the Reserve Bank were set up to, etc., with majority ownership of the Reserve Bank were set up to
meet the long-term financing requirements of industry and agriculture. Tomeet the long-term financing requirements of industry and agriculture. To
facilitate the growth of these institutions, a mechanism to provide concessionalfacilitate the growth of these institutions, a mechanism to provide concessional
finance to these institutions was also put in place by the Reserve Bank. The firstfinance to these institutions was also put in place by the Reserve Bank. The first
development bank In India incorporated immediately after independence indevelopment bank In India incorporated immediately after independence in
19481948 under theunder the Industrial Finance Corporation ActIndustrial Finance Corporation Act as a statutory corporationas a statutory corporation
to pioneer institutional credit to medium and large-scale. Then after in regularto pioneer institutional credit to medium and large-scale. Then after in regular
intervals the government started new and different development financialintervals the government started new and different development financial
institutions to attain the different objectives and helpful to five-year plans. Theinstitutions to attain the different objectives and helpful to five-year plans. The
early history of Indian banking and finance was marked by strong governmentalearly history of Indian banking and finance was marked by strong governmental
regulation and control. The roots of the national system were in theregulation and control. The roots of the national system were in the State BankState Bank
of India Act of 1955of India Act of 1955, which nationalized the former Imperial Bank of India and, which nationalized the former Imperial Bank of India and
its seven associate banks. In the early days, this national system operated alongits seven associate banks. In the early days, this national system operated along
side of a large private banking system. Banks were limited in their operationalside of a large private banking system. Banks were limited in their operational
flexibility by the government’s desire to maintain employment in the bankingflexibility by the government’s desire to maintain employment in the banking
system and were often drawn into troublesome loans in order to further thesystem and were often drawn into troublesome loans in order to further the
government’s social goals. The financial institutions in India were set up undergovernment’s social goals. The financial institutions in India were set up under
the strong control of both central and state Governments, and the Governmentthe strong control of both central and state Governments, and the Government
utilized these institutions for the achievements in planning and development ofutilized these institutions for the achievements in planning and development of
the nation as a whole. The all India financial institutions can be classified underthe nation as a whole. The all India financial institutions can be classified under
four heads according to their economic importance that are:four heads according to their economic importance that are:
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•• All-India Development BanksAll-India Development Banks
•• Specialized Financial InstitutionsSpecialized Financial Institutions
•• Investment InstitutionsInvestment Institutions
•• State-level institutionsState-level institutions
•• Other institutionsOther institutions
DEVELOPMENT FINANCIAL INSTITUTIONS:DEVELOPMENT FINANCIAL INSTITUTIONS:
PrefacePreface
The emerging economies in post colonial era faced the difficult choice ofThe emerging economies in post colonial era faced the difficult choice of
appropriate mechanism for chanalizing resources into theappropriate mechanism for chanalizing resources into the
development effort. Many of them had inherited capitaldevelopment effort. Many of them had inherited capital
starved primitive financial systems. Such system could notstarved primitive financial systems. Such system could not
be relied upon to allocate resources among competingbe relied upon to allocate resources among competing
demands in the economy. The task of institution buildingdemands in the economy. The task of institution building
was too important to be left at the mercy of the market forces at the nascentwas too important to be left at the mercy of the market forces at the nascent
stage of development. In such a situation several governments in Continentalstage of development. In such a situation several governments in Continental
Europe and East Asian economies decided to take matters into their hands andEurope and East Asian economies decided to take matters into their hands and
established institutions specifically to cater to the requirements of financialestablished institutions specifically to cater to the requirements of financial
resources for developmental effort. Such institutions were called Developmentresources for developmental effort. Such institutions were called Development
Financial Institutions.Financial Institutions.
Development financing is a risky business. It involves financing ofDevelopment financing is a risky business. It involves financing of
industrial and infrastructure projects which usually have long gestation period.industrial and infrastructure projects which usually have long gestation period.
The long tenor of such loans has associated with it uncertainty as toThe long tenor of such loans has associated with it uncertainty as to
performance of the loan asset. The repayment of the long term project loans isperformance of the loan asset. The repayment of the long term project loans is
dependent on the performance of the project and cash flows arising from itdependent on the performance of the project and cash flows arising from it
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rather than the realisability of the collaterals. The project could go wrong for arather than the realisability of the collaterals. The project could go wrong for a
variety of reasons, such as, technological obsolescence, market competition,variety of reasons, such as, technological obsolescence, market competition,
change of Government policies, natural calamities, poor management skills,change of Government policies, natural calamities, poor management skills,
poor infrastructure etc. The markets and banking institutions were highly aversepoor infrastructure etc. The markets and banking institutions were highly averse
to such uncertain outcome, besides not possessing enough information andto such uncertain outcome, besides not possessing enough information and
skills to predict with any certainty the outcome. There was also the costskills to predict with any certainty the outcome. There was also the cost
considerations associated with such risky ventures. The long term loan comesconsiderations associated with such risky ventures. The long term loan comes
with a higher price tag due to the term premium loaded into the pricing. In suchwith a higher price tag due to the term premium loaded into the pricing. In such
a situation the long term financing would be scarce as well as costly so as toa situation the long term financing would be scarce as well as costly so as to
render the project financially unviable.render the project financially unviable.
DFIs were established with the Government support for underwritingDFIs were established with the Government support for underwriting
their losses as also the commitment for making available low cost resources fortheir losses as also the commitment for making available low cost resources for
lending at a lower rate of interest than that demanded by the market for riskylending at a lower rate of interest than that demanded by the market for risky
projects. This arrangement worked well in the initial years of development. Asprojects. This arrangement worked well in the initial years of development. As
the infrastructure building and industrialization got underway the financialthe infrastructure building and industrialization got underway the financial
system moved higher on the learning curve and acquired information and skillssystem moved higher on the learning curve and acquired information and skills
necessary for appraisal of long term projects. It also developed appetite for risknecessary for appraisal of long term projects. It also developed appetite for risk
associated with such projects. The intermediaries like banks and bond marketsassociated with such projects. The intermediaries like banks and bond markets
became sophisticated in risk management techniques and wantedbecame sophisticated in risk management techniques and wanted ““a piece ofa piece of
the pie”the pie” in the long term project financing. These intermediaries also hadin the long term project financing. These intermediaries also had
certain distinct advantages over the traditional DFIs such as low cost of fundscertain distinct advantages over the traditional DFIs such as low cost of funds
and benefit of diversification of loan portfolios. The Government support toand benefit of diversification of loan portfolios. The Government support to
DFIs, in the meanwhile, was also waning either for fiscal reasons or in favourDFIs, in the meanwhile, was also waning either for fiscal reasons or in favour
of building market efficiency. Therefore, towards the end of twentieth centuryof building market efficiency. Therefore, towards the end of twentieth century
the heydays of DFIs were over and they started moving into oblivion. In severalthe heydays of DFIs were over and they started moving into oblivion. In several
economies, having attained their developmental goals, the DFIs were botheconomies, having attained their developmental goals, the DFIs were both
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restructured and repositioned or they just faded away from scene. The Indianrestructured and repositioned or they just faded away from scene. The Indian
experience has also more or less traversed the same path. Although India cannotexperience has also more or less traversed the same path. Although India cannot
said to have achieved the developmental goals yet, the Government's fiscalsaid to have achieved the developmental goals yet, the Government's fiscal
imperatives and market dynamics has forced a reappraisal of the policies andimperatives and market dynamics has forced a reappraisal of the policies and
strategy with regard to the role of DFIs in the system.strategy with regard to the role of DFIs in the system.
EVOLUTION, OBJECTIVES AND FINANCIAL POSITION OFEVOLUTION, OBJECTIVES AND FINANCIAL POSITION OF
FINANCIAL INSTITUTIONS IN INDIA:FINANCIAL INSTITUTIONS IN INDIA:
A typical structure of financial system in any economy consists ofA typical structure of financial system in any economy consists of
financial institutions, financial markets, financial instruments and financialfinancial institutions, financial markets, financial instruments and financial
services. The functional, geographic and sectoral scope of activity or the typesservices. The functional, geographic and sectoral scope of activity or the types
of ownership are some of the criteria which are often used to classify the largeof ownership are some of the criteria which are often used to classify the large
number and variety of financial institutions which exist in the economy. In itsnumber and variety of financial institutions which exist in the economy. In its
broadest sense the termbroadest sense the term ‘financial institution’‘financial institution’ would includewould include bankingbanking
institutionsinstitutions andand non-banking financial institutionsnon-banking financial institutions
1. The banking institutions may have quite a few things in common with1. The banking institutions may have quite a few things in common with
the non-banking ones. However, the distinction between the two has beenthe non-banking ones. However, the distinction between the two has been
highlighted by Sayers, by characterizing the former as ‘creators’ of credit, andhighlighted by Sayers, by characterizing the former as ‘creators’ of credit, and
the latter as mere ‘purveyors’ of creditthe latter as mere ‘purveyors’ of credit
2. This distinction arises from the fact that banks, which are part of2. This distinction arises from the fact that banks, which are part of
payment system, can create deposits and credit but the non-banking institutions,payment system, can create deposits and credit but the non-banking institutions,
which are not part of payment system, can lend only out of the resources put atwhich are not part of payment system, can lend only out of the resources put at
their disposal by the savers.their disposal by the savers.
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DEVELOPMENT FINANCE INSTITUTIONS:DEVELOPMENT FINANCE INSTITUTIONS:
An efficient and robust financial system acts as a powerful engine ofAn efficient and robust financial system acts as a powerful engine of
economic development by mobilizing resources and allocating the same to theireconomic development by mobilizing resources and allocating the same to their
productive uses. It reduces the transaction cost of the economy throughproductive uses. It reduces the transaction cost of the economy through
provision of an efficient payment mechanism, helps in pooling of risks andprovision of an efficient payment mechanism, helps in pooling of risks and
making available long-term capital through maturity transformation. Bymaking available long-term capital through maturity transformation. By
making funds available for entrepreneurial activitymaking funds available for entrepreneurial activity and through its impactand through its impact
on economic efficiency and growth, a well functioning financial sector alsoon economic efficiency and growth, a well functioning financial sector also
helps alleviate poverty both directly and indirectly.helps alleviate poverty both directly and indirectly.
In a developing country, however, financial sectors are usuallyIn a developing country, however, financial sectors are usually
incomplete in as much as they lack a full range of markets and institutions thatincomplete in as much as they lack a full range of markets and institutions that
meet all the financing needs of the economy. For example, there is generally ameet all the financing needs of the economy. For example, there is generally a
lack of availability of long-term finance for infrastructure and industry, financelack of availability of long-term finance for infrastructure and industry, finance
for agriculture and small and medium enterprises (SME) development andfor agriculture and small and medium enterprises (SME) development and
financial products for certain sections of the people. The role of developmentfinancial products for certain sections of the people. The role of development
finance is to identify the gaps in institutions and markets in a country’s financialfinance is to identify the gaps in institutions and markets in a country’s financial
sector and act as asector and act as a ‘‘gap-filler’gap-filler’. The principal motivation for developmental. The principal motivation for developmental
finance is, therefore, to make up for the failure of financial markets andfinance is, therefore, to make up for the failure of financial markets and
institutions to provide certain kinds of finance to certain kinds of economicinstitutions to provide certain kinds of finance to certain kinds of economic
agents. The failure may arise because the expected return to the provider ofagents. The failure may arise because the expected return to the provider of
finance is lower than the market-related return (notwithstanding the higherfinance is lower than the market-related return (notwithstanding the higher
social return) or the credit risk involved cannot be covered by high risksocial return) or the credit risk involved cannot be covered by high risk
premium as economic activity to be financed becomes unviable at such risk-premium as economic activity to be financed becomes unviable at such risk-
based price. Development finance is, thus, targeted at economic activities orbased price. Development finance is, thus, targeted at economic activities or
agents, which are rationed out of market. The vehicle for extendingagents, which are rationed out of market. The vehicle for extending
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development finance is called development financial institution (DFI) ordevelopment finance is called development financial institution (DFI) or
development bank.development bank.
A DFI is defined as "an institution promoted or assisted by GovernmentA DFI is defined as "an institution promoted or assisted by Government
mainly to provide development finance to one or more sectors or sub-sectors ofmainly to provide development finance to one or more sectors or sub-sectors of
the economy. The institution distinguishes itself by a judicious balance asthe economy. The institution distinguishes itself by a judicious balance as
between commercial norms of operation, as adopted by any private financialbetween commercial norms of operation, as adopted by any private financial
institution, and developmental obligations; it emphasizes theinstitution, and developmental obligations; it emphasizes the "project"project
approach"approach" - meaning the viability of the project to be financed – against the- meaning the viability of the project to be financed – against the
"collateral approach";"collateral approach"; apart from provision of long-term loans, equity capital,apart from provision of long-term loans, equity capital,
guarantees and underwriting functions, a development bank normally is alsoguarantees and underwriting functions, a development bank normally is also
expected to upgrade the managerial and the other operational pre-requisites ofexpected to upgrade the managerial and the other operational pre-requisites of
the assisted projects. Its insurance against default is the integrity, competencethe assisted projects. Its insurance against default is the integrity, competence
and resourcefulness of the management, the commercial and technical viabilityand resourcefulness of the management, the commercial and technical viability
of the project and above all the speed of implementation and efficiency ofof the project and above all the speed of implementation and efficiency of
operations of the assisted projects. Its relationship with its clients is of aoperations of the assisted projects. Its relationship with its clients is of a
continuing nature and of being acontinuing nature and of being a "partner""partner" in the project than that of a merein the project than that of a mere
"financier”"financier”
Thus, the basic emphasis of a DFI is on long-term finance and onThus, the basic emphasis of a DFI is on long-term finance and on
assistance for activities or sectors of the economy where the risks may be higherassistance for activities or sectors of the economy where the risks may be higher
than that the ordinary financial system is willing to bear. DFIs may also play athan that the ordinary financial system is willing to bear. DFIs may also play a
large role in stimulating equity and debt markets bylarge role in stimulating equity and debt markets by
(i) Selling their own stocks and bonds;(i) Selling their own stocks and bonds;
(ii) Helping the assisted enterprises float or place their securities an(ii) Helping the assisted enterprises float or place their securities an
(iii) Selling from their own portfolio of investments.(iii) Selling from their own portfolio of investments.
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EMERGENCE OF FINANCIAL INSTITUTIONS IN INDIA:EMERGENCE OF FINANCIAL INSTITUTIONS IN INDIA:
As mentioned earlier, DFIs are created in developing countries toAs mentioned earlier, DFIs are created in developing countries to
resolve market failures, especially in regard to financing of long-termresolve market failures, especially in regard to financing of long-term
investments. The DFIs played a very significant role in rapid industrializationinvestments. The DFIs played a very significant role in rapid industrialization
of the Continental Europe. Many of the DFIs were sponsored by nationalof the Continental Europe. Many of the DFIs were sponsored by national
governments and international agencies. The first government sponsored DFIgovernments and international agencies. The first government sponsored DFI
was created inwas created in Netherlands inNetherlands in 18221822. In France, significant developments in. In France, significant developments in
long-term financing took place after establishment of DFIs such as Creditlong-term financing took place after establishment of DFIs such as Credit
Foncier and Credit Mobiliser, over the periodFoncier and Credit Mobiliser, over the period 1848-18521848-1852. In Asia,. In Asia,
establishment of Japan Development Bank and other term-lending institutionestablishment of Japan Development Bank and other term-lending institution
fostered rapid industrializations of Japan. The success of these institutionsfostered rapid industrializations of Japan. The success of these institutions
provided strong impetus for creation of DFIs in India after independence, in theprovided strong impetus for creation of DFIs in India after independence, in the
context of the felt need for raising the investment rate. RBI was entrusted withcontext of the felt need for raising the investment rate. RBI was entrusted with
the task of developing an appropriate financial architecture through institutionthe task of developing an appropriate financial architecture through institution
building so as to mobilise and direct resources to preferred sectors as per thebuilding so as to mobilise and direct resources to preferred sectors as per the
plan priorities. While the reach of the banking system was expanded to mobiliseplan priorities. While the reach of the banking system was expanded to mobilise
resources and extend working capital finance on an ever-increasing scale, toresources and extend working capital finance on an ever-increasing scale, to
different sectors of the economy, the DFIs were established mainly to cater todifferent sectors of the economy, the DFIs were established mainly to cater to
the demand for long-term finance by the industrial sector. The first DFIthe demand for long-term finance by the industrial sector. The first DFI
establishedestablished in India in 1948in India in 1948 was Industrial Finance Corporation of Indiawas Industrial Finance Corporation of India
(IFCI)(IFCI) followed by setting up of State Financial Corporationsfollowed by setting up of State Financial Corporations (SFCs)(SFCs) at theat the
State level after passing of the SFCs Act, 1951.State level after passing of the SFCs Act, 1951.
13

FINANCIAL INSTITUTIONS SET UP BETWEEN 1948 AND 1974FINANCIAL INSTITUTIONS SET UP BETWEEN 1948 AND 1974
Besides IFCI and SFCs, in the early phase of planned economicBesides IFCI and SFCs, in the early phase of planned economic
development in India, a number of other financial institutions were set up,development in India, a number of other financial institutions were set up,
which included the following.which included the following.
NAME OF THE COMPANYNAME OF THE COMPANY
YEAR OFYEAR OF
ESTABLISHMENTESTABLISHMENT
ICICI LtdICICI Ltd 19551955
LICLIC 19561956
Refinance Corporation for Industries LtdRefinance Corporation for Industries Ltd 19581958
Agriculture Refinance Corporation andAgriculture Refinance Corporation and
NABARDNABARD
19631963
UTI and IDBIUTI and IDBI 19641964
Rural Electrification Corporation Ltd. and HUDCO LtdRural Electrification Corporation Ltd. and HUDCO Ltd 1969-701969-70
Industrial Reconstruction Corporation of India Ltd.Industrial Reconstruction Corporation of India Ltd. 19711971
GICGIC 19721972
It may be noted here that although the powers to regulate financialIt may be noted here that although the powers to regulate financial
institutions had been made available to RBI ininstitutions had been made available to RBI in 19641964 under the newly insertedunder the newly inserted
Chapter IIIB of RBI Act, the definition of termChapter IIIB of RBI Act, the definition of term ‘financial institution’‘financial institution’ waswas
made precise and comprehensive by amendment to the RBI Act Section 45-I (c)made precise and comprehensive by amendment to the RBI Act Section 45-I (c)
inin 1974.1974.
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIASMALL INDUSTRIES DEVELOPMENT BANK OF INDIA
(SIDBI)(SIDBI)
14

PROFILEPROFILE
Small Industries Development Bank of India (SIDBI) was established inSmall Industries Development Bank of India (SIDBI) was established in
April 1990April 1990 under an Act of Indian Parliament as a wholly-owned subsidiary ofunder an Act of Indian Parliament as a wholly-owned subsidiary of
Industrial Development Bank of India. SIDBI has since completed 8 years ofIndustrial Development Bank of India. SIDBI has since completed 8 years of
service to the small scale sector. As at March 31, 1998, SIDBI had total staffservice to the small scale sector. As at March 31, 1998, SIDBI had total staff
strength of 861 comprising of 685 professionals and 176 support staff.strength of 861 comprising of 685 professionals and 176 support staff.
SIDBI's statute provides that it should serve as the principal financial institutionSIDBI's statute provides that it should serve as the principal financial institution
for:for:
•• PromotionPromotion
•• Financing andFinancing and
•• Development of industry in the small scale sector andDevelopment of industry in the small scale sector and
•• Co-ordinating the functions of other institutions engaged in similarCo-ordinating the functions of other institutions engaged in similar
activities.activities.
SIDBI became operational onSIDBI became operational on April 2, 1990.April 2, 1990.
The Small Scale Industry (SSI) sector, which is a vibrant and dynamicThe Small Scale Industry (SSI) sector, which is a vibrant and dynamic
sub-sector of the India's industrial economy, comprises the area of SIDBI'ssub-sector of the India's industrial economy, comprises the area of SIDBI's
business. The contribution of the SSIs in terms of production, employment andbusiness. The contribution of the SSIs in terms of production, employment and
export earnings has been significant. The objectives of Government policy haveexport earnings has been significant. The objectives of Government policy have
been to impart vitality and growth impetus to the sector by removingbeen to impart vitality and growth impetus to the sector by removing
bottlenecks that affect the growth potential. In the liberalised era and emergingbottlenecks that affect the growth potential. In the liberalised era and emerging
economic scenario, the sector is assured of continued support.economic scenario, the sector is assured of continued support.
ORIGIN & OBJECTIVESORIGIN & OBJECTIVES
15

Small Industries Development Bank of IndiaSmall Industries Development Bank of India
(SIDBI) was established in April 1990 under an Act(SIDBI) was established in April 1990 under an Act
of Indian Parliament as the principal financialof Indian Parliament as the principal financial
institution for:institution for:
•• FinancingFinancing
•• Development of industry in the small scale sectorDevelopment of industry in the small scale sector
•• Co-ordinating the functions of other institutions engaged in similar activitiesCo-ordinating the functions of other institutions engaged in similar activities
Since its inception, SIDBI has been assisting the entire spectrum of SSISince its inception, SIDBI has been assisting the entire spectrum of SSI
Sector including the tiny, village and cottage industries through suitableSector including the tiny, village and cottage industries through suitable
schemes tailored to meet the requirement of setting up of new projects,schemes tailored to meet the requirement of setting up of new projects,
expansion, diversification, modernization and rehabilitation of existing units.expansion, diversification, modernization and rehabilitation of existing units.
Small Industries Development Bank of India [SIDBI] as the principalSmall Industries Development Bank of India [SIDBI] as the principal
financial institution for promotion,financial institution for promotion, financing and development of industry in thefinancing and development of industry in the
small scale sector, has been assisting the entire spectrumsmall scale sector, has been assisting the entire spectrum of the SSIof the SSI
sector,sector, including the Tiny, Village and Cottage industries.including the Tiny, Village and Cottage industries.
During the year 2002-03, the aggregate sanctions and disbursements of SIDBIDuring the year 2002-03, the aggregate sanctions and disbursements of SIDBI
amounted to Rs.10904 crores and Rs.6789 crores respectively. Cumulativeamounted to Rs.10904 crores and Rs.6789 crores respectively. Cumulative
assistance, as at the end of March 2003, surged to Rs.86, 158 crores in terms ofassistance, as at the end of March 2003, surged to Rs.86, 158 crores in terms of
sanctions and at Rs.59, 101 crores of disbursements, thus recording asanctions and at Rs.59, 101 crores of disbursements, thus recording a
compounded annual growth rate of 13.4 % and 11.4 % respectively. Net worthcompounded annual growth rate of 13.4 % and 11.4 % respectively. Net worth
of the Bank is Rs.4075 crores as at the end of March 2003.of the Bank is Rs.4075 crores as at the end of March 2003.
FUNCTIONS OF SIDBI:FUNCTIONS OF SIDBI:
16

•• It refinances loans by the primary lending institutions to small scaleIt refinances loans by the primary lending institutions to small scale
industrial units.industrial units.
•• It discounts and rediscounts bills arising out of scale of machinery toIt discounts and rediscounts bills arising out of scale of machinery to
small industrial units or manufactured by small industrial units.small industrial units or manufactured by small industrial units.
•• It extends seed capital/ soft loan assistance under self employmentIt extends seed capital/ soft loan assistance under self employment
scheme for ex- servicemen, National Equity Fund, Mahila Udyogscheme for ex- servicemen, National Equity Fund, Mahila Udyog
Nidhi, and Mahila Vikas Nidhi through specified lending agencies.Nidhi, and Mahila Vikas Nidhi through specified lending agencies.
These schemes help specified groups like women, ex- servicemen etc.These schemes help specified groups like women, ex- servicemen etc.
•• It grants direct assistance as well as refinance loans extended byIt grants direct assistance as well as refinance loans extended by
primary lending institutions for financing exports of the products ofprimary lending institutions for financing exports of the products of
small industrial units.small industrial units.
•• It extends loans to State Small Industries Development Corporations forIt extends loans to State Small Industries Development Corporations for
providing scarce raw materials to small industrial units and for makingproviding scarce raw materials to small industrial units and for making
their products.their products.
•• It also provides financial help to National Small Industries CorporationIt also provides financial help to National Small Industries Corporation
for providing leasing.for providing leasing.
MISSIONMISSION
17

To empower the Micro, Small and Medium Enterprises (MSME)To empower the Micro, Small and Medium Enterprises (MSME)
sector with a view to contributing to the process of economic growth,sector with a view to contributing to the process of economic growth,
employment generation and balanced regional developmentemployment generation and balanced regional development
SIDBI Foundation for Micro Credit (SFMC) was launched by the BankSIDBI Foundation for Micro Credit (SFMC) was launched by the Bank
inin January 1999January 1999 for channelising funds to the poor in line with the success offor channelising funds to the poor in line with the success of
pilot phase of Micro Credit Scheme. SFMC’s mission is to create a nationalpilot phase of Micro Credit Scheme. SFMC’s mission is to create a national
network of strong, viable and sustainable Micro Finance Institutions (MFIs)network of strong, viable and sustainable Micro Finance Institutions (MFIs)
from the informal and formal financial sector to provide micro finance servicesfrom the informal and formal financial sector to provide micro finance services
to the poor, especially womento the poor, especially women
OBJECTIVE OF SIDBI:OBJECTIVE OF SIDBI:
The preamble to the Small Industries Development Bank of India Act, 1989The preamble to the Small Industries Development Bank of India Act, 1989
defines thedefines the
Objective of SIDBI as:Objective of SIDBI as:
"The principal financial institution for the promotion, financing and"The principal financial institution for the promotion, financing and
development of industry in the small scale sector and to co-ordinate thedevelopment of industry in the small scale sector and to co-ordinate the
functions of the institutions engaged in the promotion and financing orfunctions of the institutions engaged in the promotion and financing or
developing the industry in the small scale sector and for the Matters connecteddeveloping the industry in the small scale sector and for the Matters connected
therewith or incidental thereto”therewith or incidental thereto”
In the SIDBI charter, four basic objectives are set out. They are:In the SIDBI charter, four basic objectives are set out. They are:
18

•• FinancingFinancing
•• DevelopmentDevelopment
•• CoordinationCoordination
For orderly growth of industry in the small scale sector.For orderly growth of industry in the small scale sector.
CHANNELS OF ASSISTANCE:CHANNELS OF ASSISTANCE:
SIDBI's financial assistance to small scale sector has three majorSIDBI's financial assistance to small scale sector has three major
dimensions:dimensions:
1.1. Indirect assistance to primary lending institutions (PLIs);Indirect assistance to primary lending institutions (PLIs);
2.2. Direct assistance to small units; andDirect assistance to small units; and
3.3. Development and Support ServicesDevelopment and Support Services
SIDBI has bagged the prestigious "SIDBI has bagged the prestigious "ADFIAP Development Award 2003ADFIAP Development Award 2003""
for its Rural Industries Programmes designed to give impetus to ruralfor its Rural Industries Programmes designed to give impetus to rural
development by creating sustainable industrial and service enterprises in ruraldevelopment by creating sustainable industrial and service enterprises in rural
areas.areas.
SUBSIDIARIESSUBSIDIARIES
SIDBI Venture Capital Ltd. [SVCL]SIDBI Venture Capital Ltd. [SVCL] a wholly owned subsidiary ofa wholly owned subsidiary of
SIDBI acts as the Asset Management Company of the National Venture FundSIDBI acts as the Asset Management Company of the National Venture Fund
for Software and Information Technology. The fund has a committed corpus offor Software and Information Technology. The fund has a committed corpus of
Rs.100 crores as on March 31, 2003.Rs.100 crores as on March 31, 2003.
19

SIDBI Trustee Co.Ltd. [STCL]SIDBI Trustee Co.Ltd. [STCL] has been set up to carry out trusteeshiphas been set up to carry out trusteeship
functions for Venture Capital Funds. Presently STCL is acting as Trustee offunctions for Venture Capital Funds. Presently STCL is acting as Trustee of
National Venture Fund for Software and Information Technology.National Venture Fund for Software and Information Technology.
Associate Organisations:Associate Organisations:
Credit Guarantee Fund Trust Scheme for Small Industries [CGTSI]Credit Guarantee Fund Trust Scheme for Small Industries [CGTSI]
promoted jointly by Government of India and SIDBI, was launched by thepromoted jointly by Government of India and SIDBI, was launched by the
Hon'ble Prime Minister on August 30, 2000. The credit guarantee scheme ofHon'ble Prime Minister on August 30, 2000. The credit guarantee scheme of
CGTSI aims at helping the new and existing industrial units in SSI sector, inCGTSI aims at helping the new and existing industrial units in SSI sector, in
getting collateral free credit by way of both term loan and working capital fromgetting collateral free credit by way of both term loan and working capital from
eligible member lending institutions. Member Lending Institutions includeeligible member lending institutions. Member Lending Institutions include
scheduled commercial banks, select Regional Rural Banks and such of thescheduled commercial banks, select Regional Rural Banks and such of the
institutions as may be approved by Government of India.institutions as may be approved by Government of India.
Technology Bureau for Small Enterprises [TBSE]Technology Bureau for Small Enterprises [TBSE] was set up by SIDBI inwas set up by SIDBI in
1995 in collaboration with United Nations Asian & Pacific Center for Transfer1995 in collaboration with United Nations Asian & Pacific Center for Transfer
of Technology. The Bureau aims at helping SSI units to attain internationalof Technology. The Bureau aims at helping SSI units to attain international
competitiveness through transfer of latest available technologies from bothcompetitiveness through transfer of latest available technologies from both
within and outside the countrywithin and outside the country
DEVELOPMENT AND SUPPORT SERVICESDEVELOPMENT AND SUPPORT SERVICES
The Bank extends development and support services in the form of loans andThe Bank extends development and support services in the form of loans and
grants to different agencies working for the promotion and development of SSIsgrants to different agencies working for the promotion and development of SSIs
and tiny industries. Over the years, the initiatives of SIDBI under promotionaland tiny industries. Over the years, the initiatives of SIDBI under promotional
and developmental activities have crystallized into the following importantand developmental activities have crystallized into the following important
areas:areas:
20

•• Enterprise Promotion with emphasis on Rural IndustrializationEnterprise Promotion with emphasis on Rural Industrialization
•• Human Resource Development to suit the SSI sector needsHuman Resource Development to suit the SSI sector needs
•• Technology UpgradationTechnology Upgradation
•• Quality and Environment ManagementQuality and Environment Management
•• Marketing and Promotion andMarketing and Promotion and
•• Information Dissemination.Information Dissemination.
RANGE OF SERVICESRANGE OF SERVICES
SIDBI REFINANCESSIDBI REFINANCES::
 Loans granted by PLIs for new SSI projects andLoans granted by PLIs for new SSI projects and
for expansion, technology upgradation,for expansion, technology upgradation,
modernisation, quality promotion.modernisation, quality promotion.
 Loans sanctioned by PLIs to small roadLoans sanctioned by PLIs to small road
transport operators, qualified professionals for self-employment, smalltransport operators, qualified professionals for self-employment, small
hospitals and nursing homes and to promote hotels and tourism-relatedhospitals and nursing homes and to promote hotels and tourism-related
activities.activities.
SIDBI DIRECTLY FINANCES:SIDBI DIRECTLY FINANCES:
 SSI units for new/expansion/diversification/modernisation projects.SSI units for new/expansion/diversification/modernisation projects.
 Marketing development projects which expand the domestic andMarketing development projects which expand the domestic and
international marketability of SSI products.international marketability of SSI products.
 Existing well-run SSI units and ancillaries/sub-contracting units/ vendorExisting well-run SSI units and ancillaries/sub-contracting units/ vendor
units for modernisation and technology upgradation.units for modernisation and technology upgradation.
 Infrastructure development agencies for developing industrial areas.Infrastructure development agencies for developing industrial areas.
21

 Leasing and hire purchase companies for offering leasing/hire purchaseLeasing and hire purchase companies for offering leasing/hire purchase
facilities to SSI units.facilities to SSI units.
 Existing export-oriented units to enable them to acquire ISO-9000 SeriesExisting export-oriented units to enable them to acquire ISO-9000 Series
CertificationCertification
APPROACH:APPROACH:
SFMC is the apex wholesaler for micro finance in India providing aSFMC is the apex wholesaler for micro finance in India providing a
complete range of financial and non-financial services such as loan funds, grantcomplete range of financial and non-financial services such as loan funds, grant
support, equity and institution building support to the retailing Micro Financesupport, equity and institution building support to the retailing Micro Finance
Institutions (MFIs) so as to facilitate their development into financiallyInstitutions (MFIs) so as to facilitate their development into financially
sustainable entities, besides developing a network of service providers for thesustainable entities, besides developing a network of service providers for the
sector. SFMC is also playing significant role in advocating appropriate policiessector. SFMC is also playing significant role in advocating appropriate policies
and regulations and to act as a platform for exchange of information across theand 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 strategysector. 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 ofto 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 significantlySFMC in the next few years, is not only expected to contribute significantly
towards development of a more formal, extensive and effective micro financetowards development of a more formal, extensive and effective micro finance
sector serving the poor in India but also ensure sustainability at all levels viz. atsector 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 ensurethe apex level (SFMC), at the MFI level and at the client level to ensure
continuance of such arrangement. Most importantly, SFMC has strived to createcontinuance of such arrangement. Most importantly, SFMC has strived to create
a mechanism in which there should be no barriers to growth. Under thea mechanism in which there should be no barriers to growth. Under the
dispensation, there is a focus on innovation and action research.dispensation, there is a focus on innovation and action research.
22

RATING OF MFIs:RATING OF MFIs:
Most micro finance programmes are being operated by NGOs and are notMost micro finance programmes are being operated by NGOs and are not
subjected to regulation and supervision as they are registered as Societies orsubjected to regulation and supervision as they are registered as Societies or
Trusts. Non-regulation of these institutions has worked to their detriment in thatTrusts. Non-regulation of these institutions has worked to their detriment in that
these institutions are not able to have smooth access to funds from the financialthese institutions are not able to have smooth access to funds from the financial
sector which is wary of lending to such entities. This constraint coupled withsector which is wary of lending to such entities. This constraint coupled with
the fact that SFMC was launched with a view to upscale the flow of microthe fact that SFMC was launched with a view to upscale the flow of micro
credit with enabling policy modifications relating to simplification of thecredit with enabling policy modifications relating to simplification of the
procedures in availment of assistance and substantial relaxation in the security /procedures in availment of assistance and substantial relaxation in the security /
collateral requirement posed a difficult challenge. Therefore, to meet thecollateral requirement posed a difficult challenge. Therefore, to meet the
requirements of the revised dispensation which called for selection of suitablerequirements of the revised dispensation which called for selection of suitable
micro finance intermediaries which could be trusted with bulk assistancemicro finance intermediaries which could be trusted with bulk assistance
without collateral constraints, Capacity Assessment Rating [CAR] waswithout collateral constraints, Capacity Assessment Rating [CAR] was
introduced by SFMC as a supplementary tool to judge risk perception.introduced by SFMC as a supplementary tool to judge risk perception.
On SFMC’s initiative, the rating of MFIs has been started by two agencies. TillOn SFMC’s initiative, the rating of MFIs has been started by two agencies. Till
March 31, 2005 224 ratings have been commissioned to MCRIL/CRISIL.March 31, 2005 224 ratings have been commissioned to MCRIL/CRISIL.
SFMC has also organized two trainings on CAMEL methodology of ACCIONSFMC has also organized two trainings on CAMEL methodology of ACCION
to build the internal capacity of SFMC officers. In addition to SFMC officers,to build the internal capacity of SFMC officers. In addition to SFMC officers,
officials from CRISIL, IIFM, Sa-Dhan, RBI, FWWB, and AFCL also attendedofficials from CRISIL, IIFM, Sa-Dhan, RBI, FWWB, and AFCL also attended
the above training.the above training.
MINIMAL SECURITY REQUIREMENTMINIMAL SECURITY REQUIREMENT::
Credit worthiness is based on the rating of the borrowing institutionsCredit worthiness is based on the rating of the borrowing institutions
instead of availability of security/ collateral requirements. Term Depositinstead of availability of security/ collateral requirements. Term Deposit
Receipts (TDRs) issued by Scheduled Commercial Banks for an amountReceipts (TDRs) issued by Scheduled Commercial Banks for an amount
equivalent toequivalent to 10% /5% /2.5%10% /5% /2.5% (depending upon geographical area of operation(depending upon geographical area of operation
and duration of partnership with SIDBI).and duration of partnership with SIDBI).
23

CAPACITY BUILDING SUPPORT FOR THE SECTOR:CAPACITY BUILDING SUPPORT FOR THE SECTOR:
SFMC’s capacity building efforts are directed not only towards MFIs butSFMC’s capacity building efforts are directed not only towards MFIs but
also towards smaller/ grassroots institutions engaged in micro financealso towards smaller/ grassroots institutions engaged in micro finance
operations, training, consultancy, rating and impact assessment etc. and otheroperations, training, consultancy, rating and impact assessment etc. and other
service providers in the form of training, seminars, workshops, orientation andservice providers in the form of training, seminars, workshops, orientation and
exposure visits. In order to strengthen the supply side of trained manpower,exposure visits. In order to strengthen the supply side of trained manpower,
SIDBI has provided support to premier management institutes for coursewareSIDBI has provided support to premier management institutes for courseware
development on elective in micro finance. The faculty and resource personsdevelopment on elective in micro finance. The faculty and resource persons
from selected institutions are regularly sponsored for international exposurefrom selected institutions are regularly sponsored for international exposure
visits and training programmes. SIDBI has also been regularly sponsoring staffvisits and training programmes. SIDBI has also been regularly sponsoring staff
of MFIs, consultants and service providers besides management faculty forof MFIs, consultants and service providers besides management faculty for
short duration training programmes in various areas of micro finance. A numbershort duration training programmes in various areas of micro finance. A number
of customised training programmes / workshops on specific areas of microof customised training programmes / workshops on specific areas of micro
finance being conducted by reputed training institutions / technical servicefinance being conducted by reputed training institutions / technical service
providers for the field and managerial staff of MFIs are also supported fromproviders for the field and managerial staff of MFIs are also supported from
time to time. Institution building efforts in the area of human resource, systems,time to time. Institution building efforts in the area of human resource, systems,
and practices are critical for healthy growth of the micro finance sector.and practices are critical for healthy growth of the micro finance sector.
Therefore, at the level of MFIs, to hasten up the process of professionalism,Therefore, at the level of MFIs, to hasten up the process of professionalism,
SFMC has been providing support for salary of young professionals to beSFMC has been providing support for salary of young professionals to be
recruited from reputed management institutions for absorption in MFIs.recruited from reputed management institutions for absorption in MFIs.
INNOVATIONS & ACTION RESEARCH:INNOVATIONS & ACTION RESEARCH:
SIDBI has taken a number of initiatives in launching / facilitating introduction /SIDBI has taken a number of initiatives in launching / facilitating introduction /
market-making of new concepts in the sector. The launch of an electronic portalmarket-making of new concepts in the sector. The launch of an electronic portal
for information dissemination and knowledge sharing within the sector andfor information dissemination and knowledge sharing within the sector and
development of MIS software for MFIs are some such initiatives. It is alsodevelopment of MIS software for MFIs are some such initiatives. It is also
24

working on an MFI standardization programmes on the lines of the Microworking on an MFI standardization programmes on the lines of the Micro
Banking Bulletin (MBB), managed by CGAP. Other major initiatives includeBanking Bulletin (MBB), managed by CGAP. Other major initiatives include
developing a common chart of accounts for the sector, creating gender anddeveloping a common chart of accounts for the sector, creating gender and
environment awareness, promoting innovations and action research onenvironment awareness, promoting innovations and action research on
emerging concepts etc.emerging concepts etc.
PROMOTIONAL ACTIVITIESPROMOTIONAL ACTIVITIES
OBJECTIVE:OBJECTIVE:
As an apex financial institution for promotion, financing andAs an apex financial institution for promotion, financing and
development of industry in the small scale sector, SIDBI meets the varieddevelopment of industry in the small scale sector, SIDBI meets the varied
developmental needs of the Indian SSI sector by its wide-ranging Promotionaldevelopmental needs of the Indian SSI sector by its wide-ranging Promotional
and development (P&D) activities.and development (P&D) activities.
P&D initiatives of the Bank aim at improving the inherent strength ofP&D initiatives of the Bank aim at improving the inherent strength of
small scale sector on one hand as also economic development of poor throughsmall scale sector on one hand as also economic development of poor through
promotion of micro – enterprises.promotion of micro – enterprises.
In pursuance of its multifaceted P&D activity, synergistic with itsIn pursuance of its multifaceted P&D activity, synergistic with its
business activities aimed at development of the small industries, SIDBI looksbusiness activities aimed at development of the small industries, SIDBI looks
forward to a partnership with NGOs, associate financial institutions, corporateforward to a partnership with NGOs, associate financial institutions, corporate
bodies, R&D laboratories, marketing agencies, etc., for national levelbodies, R&D laboratories, marketing agencies, etc., for national level
programmes.programmes.
SIDBI has identified the following thrust areas of P&D activities, whichSIDBI has identified the following thrust areas of P&D activities, which
are being undertaken in partnership with various institutions, agencies, andare being undertaken in partnership with various institutions, agencies, and
NGOs.NGOs.
25

RURAL INDUSTRIAL PROGRAMMERURAL INDUSTRIAL PROGRAMME
INTRODUCTIONINTRODUCTION
A unique approach for rural industrialization where the emphasis is onA unique approach for rural industrialization where the emphasis is on
stimulating and helping the potential entrepreneurs to set up small enterprisesstimulating and helping the potential entrepreneurs to set up small enterprises
through consultancy outfit positioned by SIDBI.through consultancy outfit positioned by SIDBI.
OBJECTIVE:OBJECTIVE:
Development of viable and self-sustaining tiny / small enterprises in rural andDevelopment of viable and self-sustaining tiny / small enterprises in rural and
semi urban India by harnessing local entrepreneurial talent. The Programmessemi urban India by harnessing local entrepreneurial talent. The Programmes
attempts to address the problems such as rural unemployment, urban migrationattempts to address the problems such as rural unemployment, urban migration
and under-utilization of local skills and resources, and is designed as aand under-utilization of local skills and resources, and is designed as a
comprehensive Business Development Services programmes.comprehensive Business Development Services programmes.
The Rural Industries Programmes (RIP) of the Bank provides a cohesive andThe Rural Industries Programmes (RIP) of the Bank provides a cohesive and
integrated package of basic inputs like information, motivation, training andintegrated package of basic inputs like information, motivation, training and
credit, backed by appropriate technology and market linkages for the purpose ofcredit, backed by appropriate technology and market linkages for the purpose of
enterprise promotion.enterprise promotion.
APPROACH:APPROACH:
Development of underdeveloped areas:Development of underdeveloped areas:
Under RIP, an economically underdeveloped district is identified and anUnder RIP, an economically underdeveloped district is identified and an
Implementing Agency (IA) Development professionals, Technical consultancyImplementing Agency (IA) Development professionals, Technical consultancy
organisation or Non- Government organisation is positioned to provide aorganisation or Non- Government organisation is positioned to provide a
comprehensive and integrated package of inputs and business developmentcomprehensive and integrated package of inputs and business development
services to potential entrepreneurs. The identified IA positions a team ofservices to potential entrepreneurs. The identified IA positions a team of
26

professionals at the field level for a period of five year. IA also provides supportprofessionals at the field level for a period of five year. IA also provides support
during post implementation period to ensure sustainability of enterprises.during post implementation period to ensure sustainability of enterprises.
Integrated approach:Integrated approach: The package of services provided by IA, inter alia,The package of services provided by IA, inter alia,
includes identifying and motivating rural entrepreneurs, identification of viableincludes identifying and motivating rural entrepreneurs, identification of viable
ventures based on local skills and resources, training, appropriate technologyventures based on local skills and resources, training, appropriate technology
linkages and finance tie-up with the formal banking sector.linkages and finance tie-up with the formal banking sector.
Performance Oriented incentivesPerformance Oriented incentives:: Enterprises are grounded on technologicalEnterprises are grounded on technological
and economic considerations. No subsidies or grants are available toand economic considerations. No subsidies or grants are available to
entrepreneurs. Besides start-up administrative support, IA is paid performanceentrepreneurs. Besides start-up administrative support, IA is paid performance
fee in the range of Rs. 500 to Rs. 7000 per unit promoted, depending on projectfee in the range of Rs. 500 to Rs. 7000 per unit promoted, depending on project
size.size.
Long term viability and sustainability of the enterprises promoted is anLong term viability and sustainability of the enterprises promoted is an
important aspect of RIP. New enterprises require continued support, at least forimportant aspect of RIP. New enterprises require continued support, at least for
the first year of their operations. Therefore, an amount of Rs. 1,000 per unit isthe first year of their operations. Therefore, an amount of Rs. 1,000 per unit is
payable to the IAs by way of post-sanction incentive over and above the initialpayable to the IAs by way of post-sanction incentive over and above the initial
performance fee for providing escort services to the assisted entrepreneurs andperformance fee for providing escort services to the assisted entrepreneurs and
post-sanction work.post-sanction work.
A sub-sectoral approach is followed to enable the implementing agencies toA sub-sectoral approach is followed to enable the implementing agencies to
provide necessary backward and forward linkages to the enterprises.provide necessary backward and forward linkages to the enterprises.
Marketing supportMarketing support:: Entrepreneurs are supported for group participation inEntrepreneurs are supported for group participation in
domestic trade fairs and exhibition cum sale.domestic trade fairs and exhibition cum sale.
27

NATIONAL BANK FOR AGRICULTURE & RURAL DEVELOPMENTNATIONAL BANK FOR AGRICULTURE & RURAL DEVELOPMENT
(NABARB)(NABARB)
INTRODUCTION:INTRODUCTION:
Recently announced National Strategies for accelerating the flowRecently announced National Strategies for accelerating the flow
of credit to farm sector include doubling the flow of agricultural credit in 3of credit to farm sector include doubling the flow of agricultural credit in 3
years, increase in disbursement from Rs.80,000 crores in 2003-04 toyears, increase in disbursement from Rs.80,000 crores in 2003-04 to
Rs.1,05,000 crores in 2004-05, financing of Atleast 100 new farmers and 2-3Rs.1,05,000 crores in 2004-05, financing of Atleast 100 new farmers and 2-3
new investment projects in various sub-sectors of agriculture by each of thenew investment projects in various sub-sectors of agriculture by each of the
rural and semi-urban branches of Commercial Banks.rural and semi-urban branches of Commercial Banks.
In the above context, NABARD's strategies, inter alia, coverIn the above context, NABARD's strategies, inter alia, cover
formulation and circulation of Model Bankable Schemes and Location Specificformulation and circulation of Model Bankable Schemes and Location Specific
Bankable Schemes to the financing banks. NABARD also proposes to identifyBankable Schemes to the financing banks. NABARD also proposes to identify
highly potential zones for undertaking investment activities in various stateshighly potential zones for undertaking investment activities in various states
and organize interactive workshops in these potential zones.and organize interactive workshops in these potential zones.
The Technical Services DepartmentThe Technical Services Department of NABARD is preparingof NABARD is preparing
and bringing model bankable agricultural projects in the areas ofand bringing model bankable agricultural projects in the areas of MinorMinor
IrrigationIrrigation,, Land DevelopmentLand Development,, Plantation & HorticulturePlantation & Horticulture,, AgriculturalAgricultural
EngineeringEngineering,, Forestry and WastelandForestry and Wasteland,, FisheriesFisheries ,, Animal HusbandryAnimal Husbandry andand
BiotechnologyBiotechnology. Besides these traditional areas, State specific area development. Besides these traditional areas, State specific area development
projects and profiles in the emerging thrust areas ofprojects and profiles in the emerging thrust areas of Medicinal & AromaticMedicinal & Aromatic
PlantsPlants, Processing of Fruits & Vegetables have also been prepared for, Processing of Fruits & Vegetables have also been prepared for
dissemination among financing banks.dissemination among financing banks.
28

GENESISGENESIS ::
• A HIGH LEVEL EXPERT COMMITTEE
(CRAFICARD) SET UP BY RBI IN 1979
RECOMMENDED FORMATION OF A
NATIONAL LEVEL ORGANISTION
FOR AGRICULTURE AND RURAL
DEVELOPMENT.
• THUS, NABARD CAME INTO BEING
ON 12 JULY 1982 UNDER AN ACT OF
PARLIAMENT.
• TOOK OVER FUNCTIONS OF
AGRICLTURE CREDIT DEPARTMENT
(ACD) AND RURAL PLANNING & CREDIT CELL (RPCC) OF
RBI AND AGRICULTURAL REFINANCE AND DEVELOPMENT
CORPORATION (ARDC).
• IS THE APEX INSTITUTION DEALING WITH POLICY,
PLANNING AND OPERATIONS IN THE FIELD OF CREDIT FOR
AGRICULTURE AND RURAL DEVELOPMENT.
MISSIONMISSION
PROMOTE SUSTAINABLE AND EQUITABLE AGRICULTURE ANDPROMOTE SUSTAINABLE AND EQUITABLE AGRICULTURE AND
RURAL PROSPERITY THROUGHRURAL PROSPERITY THROUGH EFFECTIVE CREDIT SUPPORT,EFFECTIVE CREDIT SUPPORT,
RELATED SERVICES,RELATED SERVICES, INSTITUTION DEVELOPMENTINSTITUTION DEVELOPMENT AND OTHERAND OTHER
INNOVATIVE INITIATIVES.INNOVATIVE INITIATIVES.
OBJECTIVESOBJECTIVES
•• FACILITATING CREDIT FLOW FOR AGRICULTURE ANDFACILITATING CREDIT FLOW FOR AGRICULTURE AND
RURAL DEVELOPMENT.RURAL DEVELOPMENT.
•• PROMOTING AND SUPPORTING POLICIES, PRACTICES ANDPROMOTING AND SUPPORTING POLICIES, PRACTICES AND
INNOVATIONS CONDUCIVE TO RURAL DEVELOPMENT.INNOVATIONS CONDUCIVE TO RURAL DEVELOPMENT.
•• STRENGTHENING RURAL CREDIT DELIVERY SYSTEMSTRENGTHENING RURAL CREDIT DELIVERY SYSTEM
THROUGH INSTITUTIONAL DEVELOPMENT MEASURES.THROUGH INSTITUTIONAL DEVELOPMENT MEASURES.
•• FOCUSSING ON POVERTY ALLEVIATION ANDFOCUSSING ON POVERTY ALLEVIATION AND
EMPLOYMENT GENERATION.EMPLOYMENT GENERATION.
29

•• SUPERVISING RURAL FINANCIAL INSTITUTIONS (CO-SUPERVISING RURAL FINANCIAL INSTITUTIONS (CO-
OPERATIVE BANKS AND REGIONAL RURAL BANKS).OPERATIVE BANKS AND REGIONAL RURAL BANKS).
INSTITUTIONS ELIGIBLE FOR REFINANCEINSTITUTIONS ELIGIBLE FOR REFINANCE
•• Commercial Banks, State Agriculture Development FinanceCommercial Banks, State Agriculture Development Finance
Companies(ADFCs), Primary Urban Cooperative Banks(PUCBs) andCompanies(ADFCs), Primary Urban Cooperative Banks(PUCBs) and
State GovernmentsState Governments
ELIGIBLE PURPOSESELIGIBLE PURPOSES
•• Farm Sector – Production Credit (Crop Loans) and Investment CreditFarm Sector – Production Credit (Crop Loans) and Investment Credit
•• Non-farm Sector – Investment activities of Artisans, Small ScaleNon-farm Sector – Investment activities of Artisans, Small Scale
Industries, Tiny Sector, Village and Cottage Industries, Handicrafts,Industries, Tiny Sector, Village and Cottage Industries, Handicrafts,
Handlooms, etc.Handlooms, etc.
•• Micro Credit – Revolving Fund Assistance to SHGs, VoluntaryMicro Credit – Revolving Fund Assistance to SHGs, Voluntary
Agencies/NGOs.Agencies/NGOs.
•• Loans to State GovernmentsLoans to State Governments
oo For Infrastructure Development under RIDFFor Infrastructure Development under RIDF
oo For Share Capital Contribution to Cooperative CreditFor Share Capital Contribution to Cooperative Credit
InstitutionsInstitutions
NABARD’s SUPPORT TO AGRICULTURE AND ALLIEDNABARD’s SUPPORT TO AGRICULTURE AND ALLIED
ACTIVITIESACTIVITIES
•• NABARD Refinance constitutes 28% of the total Ground LevelNABARD Refinance constitutes 28% of the total Ground Level
Credit Flow to Agriculture and Allied Activities.Credit Flow to Agriculture and Allied Activities.
•• Minor Irrigation and Forestry forms 21% of the total refinance toMinor Irrigation and Forestry forms 21% of the total refinance to
banks/financial institutions.banks/financial institutions.
•• Aggregate financial support to banks, financial institutions and StateAggregate financial support to banks, financial institutions and State
Governments during 2001-02 reached a new height of Rs.21,146Governments during 2001-02 reached a new height of Rs.21,146
crores.crores.
30

FINANCIAL ASSISTANCE AVAILABLE FROM BANKS/NABARDFINANCIAL ASSISTANCE AVAILABLE FROM BANKS/NABARD
FOR DAIRY FARMING.FOR DAIRY FARMING.
 NABARD is an apex institution for all matters relating to policy,NABARD is an apex institution for all matters relating to policy,
planning and operation in the field of agricultural credit. It serves as anplanning and operation in the field of agricultural credit. It serves as an
apex refinancing agency for the institutions providing investment andapex refinancing agency for the institutions providing investment and
production credit. It promotes development through formulation andproduction credit. It promotes development through formulation and
appraisal of projects through a well organized Technical Servicesappraisal of projects through a well organized Technical Services
Department at the Head Office and Technical Cells at each of theDepartment at the Head Office and Technical Cells at each of the
Regional Offices.Regional Offices.
 Loan from banks with refinance facility from NABARD is available forLoan from banks with refinance facility from NABARD is available for
starting dairy farming. For obtaining bank loan, the farmers shouldstarting dairy farming. For obtaining bank loan, the farmers should
apply to the nearest branch of a commercial or co-operative Bank inapply to the nearest branch of a commercial or co-operative Bank in
their area in the prescribed application form which is available in thetheir area in the prescribed application form which is available in the
branches of financing banks. The Technical Officer attached to or thebranches of financing banks. The Technical Officer attached to or the
Manager of the bank can help/give guidance to the farmers in preparingManager of the bank can help/give guidance to the farmers in preparing
the project report to obtain bank loan.the project report to obtain bank loan.
 For dairy schemes with very large outlays, detailed reports will have toFor dairy schemes with very large outlays, detailed reports will have to
be prepared. The items of finance would include capital asset itemsbe prepared. The items of finance would include capital asset items
such as purchase of milk animals, construction of sheds, purchase ofsuch as purchase of milk animals, construction of sheds, purchase of
equipments etc. The feeding cost during the initial period of one/twoequipments etc. The feeding cost during the initial period of one/two
months is capitalized and given as term loan. Facilities such as cost ofmonths is capitalized and given as term loan. Facilities such as cost of
land development, fencing, and digging of well, commissioning ofland development, fencing, and digging of well, commissioning of
diesel engine/pumpset, electricity connections, essential servants'diesel engine/pumpset, electricity connections, essential servants'
quarters, godown, transport vehicle, milk processing facilities etc. canquarters, godown, transport vehicle, milk processing facilities etc. can
be considered for loan. Cost of land is not considered for loan.be considered for loan. Cost of land is not considered for loan.
31

However, if land is purchased for setting up a dairy farm, its cost can beHowever, if land is purchased for setting up a dairy farm, its cost can be
treated as party's margin upto 10% of the total cost of project.treated as party's margin upto 10% of the total cost of project.
Nabard has been in the forefront of providing financial succor to theNabard has been in the forefront of providing financial succor to the
agriculture sector. The emergence of Nabard as an apex institution hasagriculture sector. The emergence of Nabard as an apex institution has
empowered it with all matters concerning policy, planning and operationsempowered it with all matters concerning policy, planning and operations
in the field of credit for agriculture and other economic activities in ruralin the field of credit for agriculture and other economic activities in rural
areas. As envisaged, NABARD’s mission is rural prosperity andareas. As envisaged, NABARD’s mission is rural prosperity and
performs prominently functions such as:performs prominently functions such as:
1.1. financing institutions by providing investment and production creditfinancing institutions by providing investment and production credit
support for promoting various developmental activities in rural areassupport for promoting various developmental activities in rural areas
2.2. Providing measures towards institution building for improvingProviding measures towards institution building for improving
absorptive capacity of the credit delivery system, including monitoring,absorptive capacity of the credit delivery system, including monitoring,
formulation of schemes for restructuring of credit institutions andformulation of schemes for restructuring of credit institutions and
training of personneltraining of personnel
3.3. Co-ordinating rural financing activities of institutions engaged inCo-ordinating rural financing activities of institutions engaged in
developmental work at the field level and maintains liaison with statedevelopmental work at the field level and maintains liaison with state
governments, Reserve Bank of India (RBI) and other institutionsgovernments, Reserve Bank of India (RBI) and other institutions
concerned with policy formulationconcerned with policy formulation
4.4. Undertaking monitoring and evaluation of projects supported by it.Undertaking monitoring and evaluation of projects supported by it.
This article briefly discusses the credit as well as non-credit basedThis article briefly discusses the credit as well as non-credit based
activities of the organization which helps in improving the effectivenessactivities of the organization which helps in improving the effectiveness
of credit functions.of credit functions.
32

SCHEME FORMULATION FOR BANK LOAN.SCHEME FORMULATION FOR BANK LOAN.
A Scheme can be prepared by a beneficiary after consulting localA Scheme can be prepared by a beneficiary after consulting local
technical persons of State animal husbandry department, DRDA, SLPP etc.,technical persons of State animal husbandry department, DRDA, SLPP etc.,
dairy co-operative society/union/federation/commercial dairy farmers. Ifdairy co-operative society/union/federation/commercial dairy farmers. If
possible, the beneficiaries should also visit progressive dairy farmers andpossible, the beneficiaries should also visit progressive dairy farmers and
government/military/agricultural university dairy farm in the vicinity andgovernment/military/agricultural university dairy farm in the vicinity and
discuss the profitability of dairy farming. A good practical training anddiscuss the profitability of dairy farming. A good practical training and
experience in dairy farming will be highly desirable. The dairy co-operativeexperience in dairy farming will be highly desirable. The dairy co-operative
societies established in the villages as a result of efforts by the Dairysocieties established in the villages as a result of efforts by the Dairy
Development Department of State Government and National DairyDevelopment Department of State Government and National Dairy
Development Board would provide all supporting facilities particularlyDevelopment Board would provide all supporting facilities particularly
marketing of fluid milk. Nearness of dairy farm to such a society, veterinary aidmarketing of fluid milk. Nearness of dairy farm to such a society, veterinary aid
centre, artificial insemination centre should be ensured. There is a good demandcentre, artificial insemination centre should be ensured. There is a good demand
for milk, if the dairy farm is located near urban centre.for milk, if the dairy farm is located near urban centre.
The scheme should include information on land, livestock markets,The scheme should include information on land, livestock markets,
availability of water, feeds, fodders, veterinary aid, breeding facilities,availability of water, feeds, fodders, veterinary aid, breeding facilities,
marketing aspects, training facilities, experience of the farmer and the type ofmarketing aspects, training facilities, experience of the farmer and the type of
assistance available from State Government, dairy society/union/federation.assistance available from State Government, dairy society/union/federation.
The scheme should also include information on the number of and typesThe scheme should also include information on the number of and types
of animals to be purchased, their breeds, production performance, cost andof animals to be purchased, their breeds, production performance, cost and
other relevant input and output costs with their description. Based on this, theother relevant input and output costs with their description. Based on this, the
total cost of the project, margin money to be provided by the beneficiary,total cost of the project, margin money to be provided by the beneficiary,
requirement of bank loan, estimated annual expenditure, income, profit and lossrequirement of bank loan, estimated annual expenditure, income, profit and loss
33

statement, repayment period, etc. can be worked out and shown in the Projectstatement, repayment period, etc. can be worked out and shown in the Project
report.report.
ANNEXURE-IANNEXURE-I
PRICE STABILISATION FUND SCHEMEPRICE STABILISATION FUND SCHEME
BackgroundBackground
Deeply concerned with the problems being faced by the growers of coffee,Deeply concerned with the problems being faced by the growers of coffee,
tea, rubber and tobacco due to continued low prices of these commodities fortea, rubber and tobacco due to continued low prices of these commodities for
quite some time, Government of India (GoI) has taken a series of measuresquite some time, Government of India (GoI) has taken a series of measures
to ameliorate the hardships being faced by the growers of these crops. Theto ameliorate the hardships being faced by the growers of these crops. The
Price Stabilization Fund Scheme is yet another step in the direction of thePrice Stabilization Fund Scheme is yet another step in the direction of the
GoI to demonstrate its commitment to safeguard the interests of theseGoI to demonstrate its commitment to safeguard the interests of these
growers.growers.
Objective of the SchemeObjective of the Scheme
The PSFS aims at providing financial relief to the growers when prices ofThe PSFS aims at providing financial relief to the growers when prices of
these commodities fall below a specified level without resorting to thethese commodities fall below a specified level without resorting to the
practice of procurement operations by the Government agencies.practice of procurement operations by the Government agencies.
Duration of the SchemeDuration of the Scheme
The Scheme will be operational for a period of ten years subject to a reviewThe Scheme will be operational for a period of ten years subject to a review
after five years.after five years.
Mode of InterventionMode of Intervention
Under the Scheme, a fund called the Price Stabilisation Fund will beUnder the Scheme, a fund called the Price Stabilisation Fund will be
established with contributions from the GoI and entry fee @ Rs.500/- fromestablished with contributions from the GoI and entry fee @ Rs.500/- from
each grower desirous of participating in the Scheme. The corpus of the Fundeach grower desirous of participating in the Scheme. The corpus of the Fund
shall remain undisturbed and interest earnings alone will be utilized forshall remain undisturbed and interest earnings alone will be utilized for
operational sing the PSFS.operational sing the PSFS.
34

Who can participate in the Scheme?Who can participate in the Scheme?
Initially, the Scheme will be open to growers of tea, coffee, rubber andInitially, the Scheme will be open to growers of tea, coffee, rubber and
tobacco having operational holdings of 4 hectares or less. Subsequently,tobacco having operational holdings of 4 hectares or less. Subsequently,
coverage of other growers could be considered.coverage of other growers could be considered.
How to become a memberHow to become a member
Growers of aforementioned commodities desirous of participating in theGrowers of aforementioned commodities desirous of participating in the
Scheme shall apply to the respective Commodity Board in the prescribedScheme shall apply to the respective Commodity Board in the prescribed
form within the date stipulated therefore.form within the date stipulated therefore.
The Commodity Boards shall select the members on first come first serveThe Commodity Boards shall select the members on first come first serve
basis with preference being given to the members with the least holding size.basis with preference being given to the members with the least holding size.
The Commodity Boards shall thereafter enroll the eligible grower asThe Commodity Boards shall thereafter enroll the eligible grower as
member who will be required to deposit an amount of Rs.500/- with themember who will be required to deposit an amount of Rs.500/- with the
Commodity Board.Commodity Board.
Opening and maintenance of bank accountOpening and maintenance of bank account
The member would be provided with an application form to enable him/herThe member would be provided with an application form to enable him/her
to open the ‘PSF’ account with the designated bank branch.to open the ‘PSF’ account with the designated bank branch.
The Commodity Board shall also inform the concerned bank branch forThe Commodity Board shall also inform the concerned bank branch for
opening the account in the name of the member.opening the account in the name of the member.
The account will be maintained as Savings Bank Account and would beThe account will be maintained as Savings Bank Account and would be
entitled for payment of interest at rates applicable for Savings Bankentitled for payment of interest at rates applicable for Savings Bank
Account. No service charges of any kind would be levied.Account. No service charges of any kind would be levied.
Members have to deposit their annual contributions to the account by 31Members have to deposit their annual contributions to the account by 31
March every year.March every year.
GoI contributions to the account would be made not later than 31st MayGoI contributions to the account would be made not later than 31st May
every year.every year.
At the end of the duration of the Scheme the entire balance in the accountAt the end of the duration of the Scheme the entire balance in the account
would be payable to the member.would be payable to the member.
35

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