12 Agricultural Finance-1.pptx

Agricultural Finance
Earlier – seeds were free of cost, manure was
available from animals reared by farmers
themselves, draft animals supported family
labour, own labour of family members sufficed
cultivation of land
Of late – hybrid and HYV seeds are priced highly,
fertilizers have become inevitable!!!, labour
wages are exorbitant, dependence on machinery
– labour have lost interest in spending energy in
farming, greed for extracting more from land!!!!
All farm inputs have become market based!!!!!!
Need for huge investments in Farming

Need for Agricultural Finance – Sourcing
money for farm activities
Vicious Cycle of Poverty
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 Farming – is now using capital intensive technologies
 Capital inputs – Hybrid seeds, fertilizer, tractor, etc. can
enhance the productivity of farm resources.
 Agriculture faces a lot of risk & many a times, uncertainties.
 In order to break the vicious cycle of poverty
 low returns → low savings → low investment → low
returns, provision of external finance to farmers becomes
inevitable.

Meaning: Studying or analyzing the financial aspects of farming.
i.e.,
Cost, Returns, Profitability – their timing
Fixed & variable capital needs - extents
Sources& cost (interest rates) of funds
Definition:
Murray (1953) defined agricultural finance as “an economic
study of borrowing funds by farmers, the organization and
operation of farm lending agencies and of society’s interest in
credit for agriculture”.
Tandon and Dhondyal (1962) defined agricultural finance “as a
branch of agricultural economics, which deals with financial
resources related to individual farm units.”
Agricultural Finance

 Agro – socio – economic development
 Strengthens the farm business and increases productivity of
scarce resources.
 Finance helps to increase the agricultural productivity.
 Financial investment activities results in increased farm
income.
 Farm finance can also reduce the regional economic
imbalances.
 Farm finance is like a lever with both forward and backward
linkages to the economic development.
 Supports creation of infrastructure for adoption of new
technology.
Agricultural Finance: Significance

Farmers get external financial assistance from two sources
namely,
i) Non-institutional or unorganized agencies: have been
giving loans since very long time
i) Money lenders
ii) Landlords
iii) Friends & relatives
iv) Traders & Commission agents (of-late: British era)
ii) Institutional or organized agencies:
i) Banks
ii) Cooperatives
Agricultural Finance: Sources

Agricultural Finance: Non-institutional Sources
1. Money Lenders: 2 types of money lenders in rural areas.
a) Agricultural money lenders: Main occupation – farming;
secondary occupation – money lending (concern for fellow
farmers).
b) Professional money lender: Main profession – money
lending. Lend based on security (asset)
Zamindars, Mahalwars, Ryotwars
Money lender had been a key source of credit for rural poor.
Declined over the years.
Charge very high (exorbitant) rate of interest.
In case of non-payment, forfeit the asset offered as security

2. Land Lords: Small farmers and tenants borrow – for both
productive and unproductive expenses.
Zamindars, Mahalwars, Ryotwars
Interest rates are exorbitant.
Often small farmers are forced to sell out their lands to these
land lords and they become landless labourers or bonded
labourers.
3. Traders and Commission Agents: Offer credit to get regular
supply of products & have a control over farmers.
Interest rate is relatively less
Charge more in the form of concessions and service charges.
Eg., Weight deduction, commission charges, delayed
payment etc

4. Relatives and friends: For temporary needs, mutual help.
Small amounts (all villagers – similar economic conditions).
Normally, no interest is paid on such loans.
Usually not for production (non-gainful) purposes.
Even if offered for production, end use of loan for the
borrowed purpose, is not cared for.

Agricultural Finance: Institutional Sources
 Many committees made suggestions for to overcome ill-
effects of non-institutional credit sources
 The Banking committee, (1931) and
 The Banking Commission (1972)
 Over period of time many institutions started supplying
credit to agricultural sector:
 Government
 Co-operative Banks
 Commercial Banks
 Regional Rural Banks
 Private Banks
 Refinance by National Bank for Agriculture & Rural
Development (NABARD)

1) Government: The Government provides both direct and
indirect finance to farming sector.
Direct Finance:
 Earlier, Government used to provide taccavi loans in
times of distress like famine, flood, drought etc.
 Laws enacted for agricultural development and as relief
measures during distress times, to offer long and short
term financial assistance to farmers.
 Land Improvement Act of 1883 and
 Agriculturists Loans Act of 1984
Contd…

1. Government – Indirect Finance (assistance) to Agriculture:
 Subsidized fertilizer to states according to their needs.
 Technical assistance to farmers through State Development
Programmes.
 Price stabilization schemes (MSP, MIS) for various crops.
 Subsidized Rates of interest to be charged on loans granted
to weaker sections of rural areas.
 Share capital and debentures contribution to farmer’s co-
operatives.
 Provides infrastructure facilities for the promotion of
institutional credit.

2) Co-operatives:
 Co-operative credit structure in India is characterized by two
types of institutional arrangements:
 Short & medium term credit (3-tier structure) and
 Long term credit (2-tier structure)
1. The Primary Agricultural Credit Society (PACS)
(¥ÁæxÀ«ÄPÀ PÀÈ¶ ¥ÀwÛ£À ¸ÀºÀPÁgÀ ¸ÀAWÀ) is basic
institution at Grass-root level.
2. PACS are federated (MPÀÆÌl = MlÄÖ PÀÆr¸ÀÄªÀ
ªÀåªÀ¸ÉÜ) to District Central Co-operative Bank (DCCB),
generally at the district level.
3. DCCBs are federated to State Co-operative Bank (SCB)
which is an Apex institution at the state level having close
link with the RBI and NABARD.

2) Co-operatives:
 Long term credit is provided by Land Development Banks
(LDBs).
1. Primary Land Development Banks (PLDBs) (now
renamed as Primary Co-operative Agricultural Rural
Development Banks (PCARDBs)
• Function at district / taluk / block level in some states
or through its own branches where PCARDBs do not
exist at Grassroots level.
2. PCARDBs are federated into The State / Central Land
Development Bank (now renamed as State Co-operative
Agricultural Rural Development Banks (SCARDBs) is the
Apex institution

Cooperative Agricultural Credit Structure
PACS PACS PACS PACS PACS
PACS PACS
DCCB DCCB DCCB
SCB
PCARDB/PLDB PCARDB/PLDB PCARDB/PLDB
SCARDB/SLDB

History of Banking System in India
Agricultural Finance –
Cooperative Movement

Cooperative System of Banking
• Banks, initially, mostly served the financial needs
of non-farm, industrial sector.
• Rural areas hardly had any banking institutions
• Most rural people were illiterate, with negligible
banking knowledge or even functioning of banks.
• Predominance of village lenders, zamindars,
regulated market traders/commission agents
– ‘0’ documentation and quick processing of credit
needs.

Banking process – not favourable to
farmers…..?
• Banks followed lengthy loaning process.
• Farmers lacked the required documents of farm.
• Fear of cheating about banking system.
• Poor network of banks, especially in villages.
• Small holding size – lacked security to offer.
• Small marketable surplus – low own investment.
• Occurrence of natural calamities – high risk!
• A huge debt load already accrued from the past
loans from zamindars.

Cooperative Movement in India
• End of 20th century – exploitation of farmers –
non-institutional agencies – for money reason
– 1892 – Fredrick Nicholsen Committee – “Find
Raiffeissen”
– 1901 Famine Committee – establishing credit
societies (Raiffeissen Model)
– 1901 – Edward Law Committee - establishing
credit societies (Raiffeissen Model)
• 1904 – Cooperative Credit Societies Act

Four Stages of Indian Cooperative Era
I. 1904-1911: Initiation Stage
II. 1912-1918: Modification Stage
III. 1919-1929: Expansion Stage (coinciding with
period before great depression of
1930s)
IV. 1930-1946: Restructuring Stage

I. 1904-1911: Initiation Stage
• Cooperative Credit Societies Act, 1904
• Provision for starting Cooperative Banks
• Registrar of cooperative societies to organize and
control functioning of cooperatives.
• One man – one vote system.
• Urban-rural divide – 4/5th members should be farmers.
• Personal loan
– based on collateral security
– To avoid misuse of agricultural loans
– To ensure timely repayment of farm loans

II. 1912-1918: Modification Stage
• Lacunae in 1904 Act was modified
• Cooperative Societies Act, 1912
– More focus for urban-rural divide
• Rural areas – both credit and non-credit cooperatives
• 1914 – Edward Mc Lagan Committee
- Study of lacunae in existing law; submitted report in
1915
- Delay in loan sanction
- Uneducated Farmers
- Use of funds for non-agricultural purposes
- Irregular repayment
- Nepotism (favoring the relatives, friends etc)

Recommendations – Mc Lagan
Committee
• Educating members about cooperative
principles.
• Careful scrutiny of loan applications – avoid
misappropriation.
• Promote honesty (prompt repayment).
• Follow-up of loanee.
• Promote habit of thrift (saving).

III. 1919-1929: Expansion Stage
(coinciding with period before great depression of 1930s)
• Cooperatives became provincial subject (local
focus)
• Time before depression: led to strong growth of
cooperatives
• Land mortgage banks (for long term loans)
established
– Punjab, Bombay, Madras provinces
– For long-term investment such as purchase of tractor,
irrigation, land development, plantations etc

IV. 1930-1946: Restructuring Stage
• Great depression of 1930s
• Huge fall in agricultural prices
• Coop movement collapsed
• Several committees to review the situation
• Cooperatives picked up – post World War II when
agricultural prices picked up
• Restructuring: Dr. D.R. Gadgil Committee
– Limited liability
– Credit worthiness – repayment capacity
– Link credit with marketing

Post independence :
1950 – Planning Commission
– Involve cooperatives in Rural Development
activities
– Expand cooperatives from agriculture finance to
• Marketing
• Industries
• Housing
• Farming etc

Post independence :
1951 – All India Rural Credit Survey Committee
(AIRCSC)
• Cooperative credit biased towards wealthy
• Weakest link in credit – primary credit
societies (PACS)
• “Cooperatives have failed, but must succeed”

Post independence
• 1963 - National Cooperative Development
Corporation (NCDC), New Delhi
• 1967 - Vaikunt Mehta National Institute for
Cooperative Management (VAMNICOM), Poona
• 1967 – Indian Farmer’s Fertilizer Cooperative (IFFCO)
Ltd., Kandla (1st production plant) (Gujarath)
• 1982 – National Bank for Agricultural & Rural
Development (NABARD), Mumbai

• AIRCSC opined cooperative – the only way to
promote rural credit
• Central & state governments channelized
several subsidy schemes through cooperatives
(to support coop movement)

LMB - LDB
• LMBs started in 1920s and later, benefitted
only rich farmers
• Post-independence – Efforts to include Small
and Marginal farmers to get long-term credit
• 1974 – renamed as Land Development Banks
(LDBs) instead of LMBs

4) Commercial Banks:
 Commercial banks favoured giving loans to industrial sector
than agricultural sector (highly risky).
 Until 1950: Very less finance to agriculture by commercial
banks.
 Rural Banking Enquiry Committee (1950) recommended
extension of banking facilities to rural areas.
 The Imperial Bank of India was established in 1921 by the
amalgamation of the Presidency Banks (Bank of Bengal,
Bank of Bombay and Bank of Madras).
 Until establishment of the Reserve Bank of India in 1935, the
Imperial Bank of India was the sole banker to the
government.

 Initially, Imperial Bank of India acted as an agent of the RBI
for the purpose of transacting businesses of government.
 1955: the SBI Act was passed and Imperial Bank India was
named as the SBI.
 1959: 7 associate banks of SBI was started with passage of
SBI (Subsidiary Banks) Act.
 Until 1960s: Role of commercial banks in rural credit was
negligible. All India Debt and Investment survey Report,
1961-62 and 1971-72.
 Commercial banks showed little interest in financing
agriculture.

Modern banking in India
• Originated - last decade of the 18th century
• first banks
– Bank of Hindustan - established 1770 and
liquidated in 1829–32
– General Bank of India – established 1786 but
failed in 1791
– The largest and the oldest bank which is still in
existence is the State Bank of India

SBI
• Originated and started working as the Bank of
Calcutta in mid-June 1806.
– 1809 - renamed as the Bank of Bengal.
• This was one of the three banks founded by
a presidency government.
• the other two were:
– 1840 - the Bank of Bombay
– 1843 - the Bank of Madras

SBI
• 1921 – 3 banks merged in to form
the Imperial Bank of India.
• 1955 - Post independence, renamed as
the State Bank of India.
• These banks acted as quasi-central (reserve)
banks, as did their successors.
• 1935 - Reserve Bank of India was established
in, under the RBI Act, 1934.

 July 19, 1969: 14 commercial banks with deposits > Rs.50
crores were nationalized on. PM Mrs. Indira Gandhi - Social
Control :
 Removal of control of money market by unorganized
sector.
 Provision of adequate credit for agriculture, small
industry and export.
 Build professional banking system.

Regional Rural Banks – village
extensions of Commercial Banks

4) Regional Rural Banks:
 Several reports: For addressing rural credit problems, need
for evolving a hybrid type of credit agency which combines
the
 Strong financial strength of commercial banks and
 Rural orientation of co-operatives
 1975: Working Group under chairmanship of Narasimhan.
 To review flow of institutional credit to weaker sections
& rural community
 Identified deficiencies in the functioning of co-operatives
and commercial banks and recommended setting up of
 Government-sponsored, regionally based and rural
oriented banks called Regional Rural Banks (RRBs).

4) Regional Rural Banks:
 Served Dual Features
 Co-operatives: Local feel and familiarity with several
problems of rural areas
 Commercial banks: Ability to mobilize deposits, access
to central money markets and modernized outlook.
 1976: GoI accepted this recommendation of Narsimhan
Committee and Regional Rurla Banks were established in.

Agricultural Finance –
Higher Institutional Sources
Agriculture Refinance Development
Corporation (ARDC) &
National Bank for Agriculture
and Rural Development
(NABARD)

ARDC – an introduction
• Refinance – financing to a financier
• Financier – Cooperatives and Commercial Banks,
FSS, LAMPS
• Agricultural Refinance – Financing banking
institutions for their agricultural lending, as a
support
• Before independence, long term credit (or term
finance)
– Money lenders
– State government

Agricultural Refinance Corporation
(ARC) – evolution
• AIRCSC (1951) & Committee on Cooperative
Credit (1960)
– Inadequacy of term credit – agricultural investment
– Suggested – establishment of apex institution
• 1963 – (1st July) established Agricultural
Refinance Corporation (ARC) (through an Act of
Central Government)
– Refinance agency – LT refinance
– To promote and develop agriculture

ARC to ARDC
• Keeping ARC’s Developmental Role
– ARC renamed as ARDC
• ARDC provides
– Medium and Long-term loans to major
agricultural development projects
– These projects were not financed earlier by
institutional agencies

ARDC - role
• Initially,
• Refinance
• Assist
• Guide
State Cooperative Land
Development Banks (long term
finance)
• Later extended to,
• Scheduled commercial banks
• State cooperatives
• 1980 – started giving Short-term refinance as well.

Broad functions - ARDC
• Refinance – agricultural investment in big way
• Assistance to Governmental agencies –
formulation of ‘technically feasible’ and
‘financially viable’ projects
• Assistance to small farmers
• Lending Diverse activities (to cover economic
activities all over the country; balanced growth)
• Balanced growth – concentrate on backward and
underdeveloped areas

Activities of refinance
• Afforestation projects
• Horticultural development
• Plantation crops – pepper cardamom, clove, coffee, tea,
rubber etc
• Infrastructure development – market, warehouse, cold
storage
• Dairy, sheep breeding & rearing, fisheries, poultry,
sericulture, shrimps
• Minor irrigation – tube well, dug well, pump set,
energization of well
• Soil conservation, reclamation and dry farming
• Mechanization & agro-service centers
80-90% of
refinance
went to

Purpose
• Remove regional imbalance –
– By preparing bankable projects in each region (Banks)
– One or the other Community Development Projects
– Special concessions to small & marginal farmers
• SFDA, MFAL, IRDP @9.5% RoI (lesser rate)
• longer repayment period
• 90% of loan amount refinance (generally it is only 75%)
• Provided support in developing bankable project – Banks in
collaboration with Governments and other agencies

Sources of funds
• Rs. 25 Crore – Authorized share capital
• Rs. 5 Crore – paid-up share capital
• ARDC’s shares (bonds) – guaranteed by GoI
• Thus, the two sources of funds – share capital,
sale of bonds guaranteed by GoI

ARDC - Management
• Board of Management – 9 members
Chairman
(Deputy Governor - RBI)
Managing Director
(appointed by RBI)
1 Director
(RBI Nominee)
3 Directors
(Govt.
Nominee)
3 Directors
(Elected- SCLDB,
SCB, CB, LIC etc)

NABARD – Genesis
• ARDC
– Inadequate rural credit finance
– Many aspects like
• Institution building
• Training
• Research
• Policy making
• Planning
• Providing expertise in many agri & rural development
disciplines – needed for uplift of rural areas were found
insufficient

NABARD – Genesis
(recommended by)
• Many Committees & Commissions
– Banking Commission (1972)
– National Commission on Agriculture (1976)
– Committee to Review Arrangements for Institutional
Credit for Agriculture & Rural Development -
CRAFICARD (1979)
• Headed by – B. Sivaraman (former Planning Commission
Member)
• Recommended setting up of National Level
Institution – NABARD
– Provide - production and investment credit for agri &
RD

NABARD – Formation
12th July 1982
3 National Level Institutions
ACD •of RBI
RPCC •of RBI
ARDC •GoI
RPCC – Rural Planning & Credit Cell

NABARD Fund Source
Rs. 500 Crore - Paid-up Share Capital
(Equal contribution from GoI & RBI)
Rs. 100 Crore – Issued Capital
Head Office - Mumbai
17 Regional Offices –
Major States
10 Sub-offices – smaller
states & Union Territories

NABARD – Board of Management
(Directors & BoM are appointed by Central
Government in consultation with RBI)
Direction, Management & Supervision of NABARD
Chairman Managing Director
13 Directors (Advisory Council)
1 - Rural
Economics
Expert
1 – Rural
Credit
Expert
3 – Reps of
Cooperativ
es
3 – Reps of
Commercia
l Banks
3 – Govt of
India
Officials
2 – State
Governme
nt Officials
Chief Executive

Other Sources of funds - NABARD
Borrowings
from
Issue & sale
of Bonds by
Deposits
from
• GoI
• Any institutions
approved by GoI
• RBI
• GoI
• State Government
• Local Authorities
Gifts & Grants

Objectives
• Credit supply
– Agriculture
– Rural Development
• Promote & Integrate RD Activities through Refinance
• Direct Credit (Central Government approval)
– Individual
– Organization
– Institution
• Close link with RBI – Guidance & Assistance in Financial
Matters
• Catalyses formulation of RD programmes and plans

NABARD Functions
Credit
Devel
opme
nt
Regulat
ory

Credit Activities
• Prepares – Potentially Linked Plans (PLPs)
– Which is basis for District Credit Plans
• Participation - Annual Action Plan - Block,
District and State level
• Monitor – Credit Plan implementation
• Terms & Conditions – financing production,
marketing and investment – rural farm and
non-farm activities
• Refinance

Credit Activities – Refinance
(Short-term, Medium & Long-term Refinance)
• Short-term (ST) Refinance (Upto 12 months)
– Agril production and marketing – farmers,
farmer’s cooperatives
– Marketing & distribution of inputs – seed,
fertilizer, chemicals
– Production & marketing activities – village &
cottage industries
• Eligible institutions – SCBs, RRBs, CBs & other
Fin institutions approved by RBI

Credit Activities – Refinance
(Short-term, Medium & Long-term Refinance)
• Medium (MT) & Long-term (LT) Refinance (up
to 15 years)
– Investment – agri & allied: Minor irrigation,
mechanization, soil conservation, livestock,
plantation, fishery, storage & marketing yards etc
– Investment – village artisanal works: handicrats,
handlooms etc
– Activities of SHGs – rural poor (eg., agro
processing)
– Share capital Investment – agri & RD institutions

Credit Activities
(Rescheduling of Refinance)
Short
Term
Medium
Term
Long
Term
• Rescheduling: conversion of
– ST to MT Refinance
– MT to LT refinance
• NABARD
• Pursued during the occurrence of Natural Calamities,
military operations and emergency situations

Criteria & Extent of Refinance
(funds routed through banks;
Beneficiaries: individuals, partnerships, state owned
corporations, cooperatives)
• Criteria
– Technical feasibility
– Financial viability
– Organization arrangements – close supervision by financing banks
• Extent (ranges from 50% to 100%; rest: banks/state/ central Govt)
Purpose Refinance (%)
Pilot rainfed farming projects 100
Waste land development schemes 100
Non-farm sector 100
Agro-processing 75
Bio-gas 75
Govt Schemes (eg IRDP) 70
Farm mechanization 50
Rural Electrification Corporation 50

Interest Rate and Conditions
• Interest rate: NABARD Refinance
– Vary from time to time
– Fixed such that: banks get a margin of 3-5%
• Stipulation:
• Margin money (owner contribution) of 5-25% of
project cost
• Depends on type of investment and class of borrower
• Corporate/Govt department projects: margin money –
25%

Developmental Activities
• Institutional Development: Training to banking personnel (BIRD,
CAB), Development Action Plan preparation; Financial Assistance
for RRBs and Cooperatives to improve monitoring cells etc
• Research & Development Fund: technology upgradation & transfer,
organizing seminar, conference etc., grants to KVKs
• Agricultural & Rural Enterprises Incubation Fund (AREIF):
Assistance to new & innovative small rural enterprises
• Rural Promotion Corpus Fund: training-cum-production centers
• Credit & Financial Services Fund: assistance to innovation in rural
banking
• Linking SHG to Credit Institutions (100% refinance)

Regulatory Activities
(plays RBIs role w.r.t. Cooperatives and RRBs)
• Inspection: maintenance of statutory
requirements – reserves (CRR, SLR etc)
• Opening new RRB/Cooperation:
Recommendation of NABARD is mandatory
• Authorization: SCB/DCCB to offer loan outside
cooperative sector (beyond certain limit of
loan)

Classification of Agricultural Credit

Classification of Agricultural Credit
Agricultural credit can be classified based on
 Purpose
 Time (repayment period)
 Security
 Generation of surplus funds
 Creditor

Agricultural Credit Classification
i) Based on Purpose:
a) Development credit or Investment Credit: for Long-term
investment activities (purchase of machinery, land
development, fruit orchard establishment, etc)
b) Production credit Short-term loan (seed, fertilizer, PPC
etc)
c) Marketing credit Loan to avoid distress sale
d) Consumption credit (personal, vehicle, housing loans etc)

ii) Based on Repayment Period: Based on the period for which
the borrower require credit, it is divided into:
a) Short-Term Credit: 6 to 18 months
b) Medium-Term Credit: 2 to 5 years
c) Long-Term Credit: 5 to 25 years

iii) Based on Security: Credit is provided to farmers based on
the security offered by them.
a) Farm Mortgage Credit – Immovable asset, usually
land
b) Hypothecated Credit – Movable asset
c) Collateral Credit or Chattel Credit -
d) Personal Credit – Personal security (either 1st party
i.e., own or 3rd party – friend, relative, colleague etc)

iv) Based on Liquidity (Generation of Surplus Fund to repay
loan within single production cycle)
a) Self Liquidating Credit: Loan amount gets absorbed in the
production process in one year or production period
Additional income generated is sufficient to repay the
entire loan amount within the same period.
b) Non-Self Liquidating Credit: Loan amount consumed in the
production process during the project period (several
years).
Additional income generated in one year is not sufficient to
repay the entire loan amount and hence the repayment is
spread over to number of years.

v) Based on Creditor or Lender wise Credit: Credit can be
classified from the point of view of creditor.
a) Non- Institutional Agencies: They include money lenders,
traders, commission agents, friends and relatives. This kind
of loan is generally exploitative.
b) Institutional Agencies: They include co-operative’s,
commercial bank and regional rural bank.

Crop Loan System
 Adoption of crop loan system was recommended by many
committees.
 1954: Even though All India Rural Credit Survey
Committee (AIRCSC) [chairmanship of Sri. Gorwala]
 1960: Committee on Co-operative credit [V.L. Mehra]
 1965: Crop Loan System was introduced throughout the
country and
 In Kharif, 1966: Introduced in Karnataka.
The twin objectives of crop loan system are:
 Treating crop as security instead of immovable property like
land.
 Fixing the scale of finance depending up on the actual farm
expenditure i.e. based on cost of cultivation.

Crop Loan System
Salient features of the crop loan system:
 Scale of Finance to be estimated based on the cost of
cultivation of crops, based on
 Place (District/Taluk) of production
 Variety (local or HYV),
 Season (Kharif/Rabi/summer) of cultivation
 Type of crop i.e., irrigated or rainfed crop.
 Eligibility to receive the loan not measured by ownership of
land but by him being a real farmer who needs credit for
cultivation.
 Security: hypothecation of the crop.
 Disbursement and recovery – in accordance with the crop
production schedule.

Crop Loan System
Salient features of the crop loan system:
 The loans should include both cash and kind components.
 Eg., Kind – payment directly to fertilizer shops
 Crop loan is fixed by the District Level Technical Committee
(DLTC) consisting of experts from the fields of agriculture,
animal husbandry, banking etc.

Crop Loan System
Scale of Finance – Crop enterprise:
 Indicative cost taken as base for fixing amount to be
financed to a farmer.
 Scale of finance is fixed for annual, perennial crops and
livestock also.
 Normally, scale of finance is given in a range, as the cost of
cultivation
 Traditional methods of farming and
 Progressive farmer practicing modern methods of
cultivation.

Crop Loan System
Scale of Finance - Livestock:
 Livestock will have fixed costs of finance and they are
termed as unit costs.
 The unit varies with the type of livestock.
 Ex: for milch cattle the unit refers to 2 animals,
 for sheep and goat a minimum of 10 animals and
 for poultry a minimum of 500 birds.

Schemes for financing weaker
sections – social & economic

Schemes for financing weaker sections
i) Differential Interest Rate (DIR) Scheme:
 Cheaper interest rate - To weaker sections of the society -
Do not possess tangible assets to put as security, at a
concessional rate of 4 per cent per annum.
 DIR loans are insured by Deposit Insurance and Credit
Guarantee Corporation of India (DICGC).
 Marginal Farmers and Agricultural Labourers
 SC and ST engaged in agriculture
 Rural and cottages industries, hoteliers, rickshaw
pullers, cobblers, basket makers, carpenters, physically
challenged persons, orphans and indigent students
pursuing higher education etc.

ii) Integrated Rural Development Programme (IRDP): 1978 -79
 Popularly called as Anti-poverty Programme.
 The GoI replaced several rural welfare programmes with one
single integrated programme. Twin objectives:
 Elimination of poverty and unemployment in rural areas.
 Achieve rural development
 IRDP - funded by central and state govts (50: 50).
 Existing programmes – Small Farmer’s Development Agency
(SFDA), Marginal Farmers & Agricultural Labourers Development
Agency (MFAL), Drought Prone Area Programme (DPAP),
Command Area Development Agency (CADA), National Rural
Employment Programme (NREP) and Training of Rural Youth for
Self Employment (TRYSEM) etc, have been merged.
 Others living below poverty line (BPL) are covered.

iii) Ganga Kalyan Yojana (GKY): 1997
 Sponsored by Central Government.
 Objective - To provide irrigation through exploitation of
ground water
 Tube wells and bore wells to individual as well as group
of beneficiaries belonging to the
 Target groups: small and marginal farmers & those
falling below poverty line (BPL).

iv) Swarnajayanti Gram Swarozgar Yojana [SGSY]: 1-4-1999
 Central Govt. programme – for poverty alleviation through
self employment.
 Organization of the poor into SHGs, training, credit,
technology, infrastructure and marketing.
 Replaced poverty alleviation programmes viz.
 IRDP
 Training of Rural Youth for Self Employment (TRYSEM)
 Development of Women and Children in Rural Areas
(DWCRA)

Economic Feasibility Tests
or
Principles of Credit Management

Economic Feasibility Tests or Principles of Credit Management
 Once bank receives loan proposal, banker should be
convinced about the economic viability of the proposed
investments.
Three basic financial aspects (of proposal) are to be assessed,
 Will it generate returns, more than costs?
 Will the returns be surplus enough to repay the loan
 Will the farmer stand up to the risk and uncertainty
These three financial aspects are known as 3 R’s of credit,
which are as follows
a) Returns to investment
b) Repayment capacity
c) Risk- bearing ability

a) Returns to Investment:
 This is an important measure in credit analysis.
 Expected Return = Expected output X Expected price.
 Only if Expected Return is more than Expected Costs,
Banker can consider loan application.
 Depends on - What to grow? How to grow? How much
to grow? When to sell? Where to sell?
 Are right decision taken by farmers?

b) Repayment Capacity:
 Do the loan proposal generate income enough to return to
repay the loan along with accrued interest? Within the
stipulated time.
 Many times the loan may be productive enough to
generate additional income but may not be productive
enough to repay the loan amount.
 Project should not only profitable, but also have potential
for repayment of the loan amount.
 Only then, the farmer will get the loan amount.

c) Risk Bearing Ability:
 It is the ability of the proposed project to withstand the risk
that arises due to unforeseen circumstances (drought,
flood, war, epidemic, cyclone, price crash etc).
 Risk can be quantified by statistical techniques like
coefficient of variation (CV), standard deviation (SD)
 Some sources / types of risk
 Production/ physical risk.
 Technological risk.
 Personal risk
 Institutional risk
 Weather uncertainty.
 Price risk
Whether the project
produces sufficient net
returns, that withstands risk?
i.e.,
Possible reduction in income
due to any of risk situations

Five Cs of credit –
 Character (Trust worthiness)
 Capacity (Repayment)
 Capital (Own investment/equity)
 Condition and (terms, conditions, procedures)
 Commonsense

Five Cs of credit
1) Character:
 Most basic for any credit transaction is trust.
 Trust – more important than security, for banker.
 Banker’s confidence – influenced by moral characters of
the borrower like honesty, integrity, commitment, hard
work, promptness etc.
 Therefore both mental and moral character of the
borrowers will be examined while advancing a loan.
 Generally people with good mental and moral
character will have good credit character as well.

Five Cs of credit
2) Capacity:
 It means capacity of an individual borrower to repay
the loans when they fall due.
 It largely depends upon the income obtained from the
farm. C= f(Y) where C= capacity and Y = income.
3) Capital:
 Capital indicates the availability of money with the
farmer - borrower.
 When his capacity and character are proved to be
inadequate the capital will be considered.
 It represents the net worth of the farmer.
 It is related to the repayment capacity and risk bearing
ability of the farmer - borrower.

Five Cs of credit
4) Condition:
 It refers to the conditions needed for obtaining loan
from financial institutions i.e. procedure to be followed
while advancing a loan.
5) Commonsense:
 This relates to the perfect understanding between the
lender and the borrower in credit transactions.
 This is in fact prima-facie requirement in obtaining
credit by the borrower.

Loan Repayment Plans
(For MT & LT Loans)

Loan Repayment Plans (For MT & LT Loans)
Repayment of loan – Monthly Installments (equal or unequal)
1) Straight-end repayment plan or single repayment plan
(or) lump sum repayment plan:
 The entire loan amount is to be cleared off after the
expiry of stipulated time period.
 The principal component is repaid by the borrower at a
time in lump sum when the loan matures (term ends),
while interest is paid each year.
Principal Principal
Interest
Principal
Interest
Inter
est
Time
(Months)
1
2
3
4
5
6

2) Partial repayment plan or Balloon repayment plan:
 Here the repayment of the loan will be done partially over
the years.
 As repayment proceeds, the installment amount will be
decreasing
 Except in the maturity year (final year), during which a
large amount is repaid, as the investment generates a bulk
revenue.
 This is also called as balloon repayment plan, as the large
final payment made at the end of the loan period (i.e. in
the final year) after a series of smaller partial payments.

Principal
Inter
est
Principal
Interest
3) Amortized repayment plan:
 Amortization means repayment of the entire loan amount
in a series of installments.
 This method is an extension of partial repayment plan.
Amortized repayment plans are of two types
a) Amortized decreasing repayment plan: Here the
principal component remains constant over the entire
repayment period and the interest part decreases
continuously. NOTE: Installment amount decreases
b) Amortized even repayment plan: Annual installment
over the entire loan period remains the same (EMI). The
principal portion of the installment increases continuously
and the interest component declines gradually.

4) Variable repayment or Quasi-variable repayment plan:
 At times of good harvest a larger installment is paid and at
times of poor harvest smaller installment is paid by the
borrower.
 Hence, according to the convenience of the borrower the
amount of the installment varies here in this method.
 This method is not found in lending by institutional
financial agencies.
5) Optional repayment plan:
 Here in this method an option is given to the borrower to
make payment towards the principal amount in addition to
the regular interest.

6) Reserve repayment plan or Future repayment plan:
 This type of repayment is seen with borrowers in areas
where there is variability in farm income.
 In such areas the farmers are haunted by the fear of not
paying regular loan installments.
 To avoid such situations, the farmers make advance
payments of loan from the savings of previous year.
 This type of repayment is advantageous to both the banker
and borrower.
 The bankers need not worry regarding loan recovery even
at times of crop failure and on the other hand borrower
also gains, as he keeps up his integrity and credibility.

Crop Insurance
 Agricultural production and farm incomes in India are
frequently affected by natural disasters such as
 Drought, floods, cyclone, storm, landslide, earthquake
etc. & also by price fluctuations
 Epidemics or disasters – Covid-19, Fire, sale of spurious
seeds, fertilizers and pesticides, price crashes, etc.
 Loss of production / farm income – beyond the control of
farmers. Categorized as Risk & Uncertainty
 Insurance – One of the mechanism cover risks (& not
uncertainty) to output and income.

Crop Insurance
 Insurance is a legal contract that transfers risk from policy
holder (farmer) to an insurance company in exchange for a
premium.
 Some important terminologies used;
 Insurance Company: A company that provides the
insurance coverage for its policyholders
 Policyholder: The person who has purchased and
owned an insurance policy.
 Risk Coverage or indemnity: The possibility of financial
loss (amount) that will be covered by insurance policy
 Premium: The cost of insurance (or purchase price)

Crop insurance schemes in India
Four insurance schemes are being implemented in India
presently by the government to support farmers
 Pradhan Mantri Fasal Bima Yojana (PMFBY)
 Weather based Crop Insurance Scheme (WBCIS)
 Coconut Palm Insurance Scheme (CPIS) and
 Pilot Unified Package Insurance Scheme UPIS) (45 districts).

Project Management
• Project is an activity undertaken systematically with
specific objectives to achieve &
– Specific starting & ending time
• Projects are said to be cutting edges of development
– Conceived in the minds of Promoter
– Takes a shape in the form of a project proposal
• Containing objectives, ways & means of achieving it
• Details of project – Technical, financial, commercial, managerial,
organizational, social & economic etc
– Implemented under the monitoring & supervision of
promoter
– Successful completion leads to achievement of objective
and leads to formulation of new project

Project Management
Key components of project management are:
 Time – the intended duration of the work
 Cost – the budget allocated for the work
 Scope – what innovations or changes will be delivered by
the project
 Quality – standard of outcome of the project.
 Increasing or decreasing any one of these components will
affect the others.
 For example, reducing the time allocated to complete the
project will also reduce the amount of work that can be
done (scope), which may then affect the quality and
the cost of the project.

Project Management
Project management stages:
 Identification – the project manager defines what the project will
achieve and realize, working with the project sponsor and stakeholders
to agree deliverables.
 Formulation – the project manager records all the tasks and assigns
deadlines for each as well as stating the relationships and dependencies
between each activity.
 Implementation – the project manager builds the project team and also
collects and allocates the resources and budget available to specific
tasks.
 Monitoring – the project manager oversees the progress of project work
and updates the project plans to reflect actual performance.
 Closing – the project manager ensures the outputs delivered by the
project are accepted by the business and closes down the project team.

Financial analysis of Projects: Capital Budgeting
 Capital budgeting is a process of evaluating investments and
huge expenses in order to obtain the best returns on
investment.
 A firm is often faced with the challenges of selecting
between two projects/investments or the buy v/s replace
decision.
 Investment in all profitable projects is desirable. But due to
limitation on the availability of capital, an organization has
to choose between different projects/investments.
 Under such circumstances, the technique of capital
budgeting helps you to make better decision.

Capital Budgeting
Objectives of Capital budgeting: In many businesses, huge
investments are made and they have a long-term effect.
Therefore, while performing a capital budgeting analysis an
organization must keep the following objectives in mind:
 Selecting profitable projects: Among alternative projects, many
are profitable.
 Due to limited capital availability – select the right mix of
profitable projects that will increase its shareholders’ wealth.
 Capital expenditure control: Selecting most profitable investment
 However, controlling capital costs is also an important
objective.
 Forecasting capital expenditure requirements and budgeting
for it, and ensuring no investment opportunities are lost, is
the crux of budgeting.

Capital Budgeting
 Finding the right sources of funds: Determining the
quantum of funds and the sources for procuring them is
another important objective of capital budgeting.
 Finding the balance between the cost of borrowing and
returns on investment is an important goal of Capital
Budgeting.

Capital Budgeting - Techniques
Undiscounted (without considering time value of money)
techniques
1) Returns to Investment
2) Payback period (PBP)
Discounted (considering time value of money) techniques
(Becomes important when cash flows are spread over a number
of years)
1) Net present worth or value (NPW/NPV)
2) Benefit – cost ratio (B:C ratio)
3) Internal rate of return (IRR)

Capital Budgeting – Discounted techniques
1) Net present worth / Value (NPW/NPV):
 Most direct discounted measure of project worth is NPW.
 It is simply the present worth of net benefit cash flow
stream.
 Steps:
1. Cost and returns on year to year basis are estimated.
2. Estimate the worth of the project on year to year basis,
i.e., costs – returns or net return stream (cash flow).
3. Then discounted to present value.
4. Add discounted net cash flow over the years to arrive at
NPW.

Capital Budgeting
1) Net present worth / Value (NPW/NPV):
Mathematically,
Where,
NPV = Net present value,
CFn= Net Cash flow occurring at the end of year n (n =
0……..t)
t = life of the project,
r = discount rate
Decision rule: Since it is net cash flow (discounted)
The guiding principle regarding the worthiness of a project is
that the net present worth shall be positive at the cost of
capital.

Capital Budgeting - Discounted measure
2) Benefit Cost Ratio ((B:C ratio))
• It is the ratio of Discounted benefit (returns) to the
Discounted cost.
• For a profitable enterprise Benefit > Cost (Profit)
• If Benefit > Cost, (B:C ratio) will be greater than 1
• Decision Criteria:
– Should be greater than 1.
– If B=C, then neither profit, nor loss
– If B<C, then loss
• Procedure:
– Cost and returns on year to year basis are estimated.
– Calculate their Present value by discounting (using appropriate
discount rate), for each year
– Add Discounted Costs & Discounted Benefits separately
– Compute the ratio of the sum of Discounted Benefits to sum of
Discounted Costs

• Where,
• CIF= Cash Inflow (Return) at the end of year t
• COF= Cash Outflow (Cost) at the end of year t
• r= Discount Rate
• t= Year of Cash flow
𝐵𝐶𝑅 =
𝐶𝐼𝐹1
(1 + 𝑟)1
𝐶𝑂𝐹1
(1 + 𝑟)1
+
𝐶𝐼𝐹2
(1 + 𝑟)2
𝐶𝑂𝐹2
(1 + 𝑟)2
+
𝐶𝐼𝐹1
(1 + 𝑟)3
𝐶𝑂𝐹1
(1 + 𝑟)3
+ ⋯ +
𝐶𝐼𝐹𝑛
(1 + 𝑟)𝑛
𝐶𝑂𝐹1
(1 + 𝑟)𝑛
𝐵𝐶𝑅 =
𝑡=1
𝑛 𝐶𝐼𝐹𝑡
(1 + 𝑟)𝑡
𝐶𝑂𝐹𝑡
(1 + 𝑟)𝑡

Capital Budgeting
2) Internal rate of return (IRR):
 A method of using the net benefit stream (cash flow) for
measuring the worth of a project is to determine the
discount rate that makes the net present worth of
incremental net benefit stream (Incremental cash flow)
equal to zero.
 This discount rate is called the internal rate of return (IRR).
 In computing IRR, a systematic procedure trial and error
method is used to find out two discount rates.
 One discount rate at which NPV is nearer to zero but
positive
 Another discount rate at which makes NPV is nearer to
zero but negative
 IRR can be calculated by using the formula as

IRR Formula
• LDR = Lower Discount Rate (Close to Zero but
positive NPV)
• HDR = Higher Discount Rate (Close to Zero but
negative NPV)
• DR = Discount Rate
• NPV= Net Present Value
𝐼𝑅𝑅 = 𝐿𝐷𝑅 + 𝐷𝑖𝑓𝑓 𝑏/𝑤 2 𝐷𝑅𝑠
𝑁𝑃𝑉 𝑎𝑡 𝐿𝐷𝑅
(𝑁𝑃𝑉 𝑎𝑡 𝐻𝐷𝑅 − 𝑁𝑃𝑉 𝑎𝑡 𝐿𝐷𝑅)

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