SCOPE OF FINANCIAL SERVICES Shift from Barter deals to financial services Savings(Thrift), Credit, Investment, Insurance Cover, etc. Financial Inclusion : Ensuring that everybody has easy access to the Financial Services Banks – accepts deposits, issue of cheques/drafts, transfer of money and credit- also investment, insurance cover, etc Other agencies offering financial services – NBFCs, SHGs, local money lenders(including arthias or agents), etc.

Rural Finance Deposits Credit for Agriculture Credit for Non-farm Sector Activities including trading activities Crop/ Cattle/ Poultry Insurance Housing Finance Consumption Credit

History of Rural Finance in India 1.Mostly money lenders till 1930s 2.Cooperative Banks and Land Mortgage Banks as purveyor of farm credit 3.Social Control of banks 4.Nationalisation of Banks 5.Priority Sector Lending 6.Genesis of RRBs 7.Establishment of NABARD 8.Service Area Approach 9.Agriculture Insurance 10.Kisan Credit Cards 11.Doubling of Agri. Credit

Reserve Bank of India National Bank for Agriculture and Rural Development Commercial Banks Regional Rural Banks(62) Cooperative Banks Rural Branches Branches S.T.Strcture L.T.Structure SCBsSCARADBs DCCBs PCARDBs PACS RURAL FINANCIAL INSTITUTIONS IN INDIA

Agricultural finance - micro level and macro level. Macro- finance – Credit needs of the agricultural sector as a whole and the terms and conditions under which the credit is available Micro- finance refers to the financial management of individual farm business. FINANCING 0F AGRICULTURE

Significance of Agricultural Finance : 55% of the population depends on agriculture for their sustenance Value Addition to Agriculture Capital Formation in Agriculture Use of modern technology for productivity/ production increase and cost reduction Use of inputs for better productivity Reducing Imbalances in regional development Development of Allied Activities Reduction of Risks in Agriculture

Credit for Agriculture : Farmers need financial support by way of credit for: To meet the expenditure on purchase of seed, fertilizers, pesticides, for paying for agri. labour, etc. for farming To meet the consumption expenditure of his/her family Purchase of land for farming, make improvement in the land, to clear old debts Purchase of farm machinery, cattle, etc. To invest in irrigation(including water harvesting) and meet the recurring expenditure for water lifting, etc. and For taking up allied activities like dairy, fisheries, storage and godowns Credit to come from family members, friends, local money lenders or financial institutions till his crops are harvested and value realised.

Agency % share in total Growth% share Com.Banks166, %332, %74.5% RRBs20,4358.9%43, % Coop.Banks42, %70, %15.7% Total229, %446, %100% GROUND LEVEL CREDIT FLOW : TO Rs in crore

Agency Annual Growth CAGR ( to ) % share Com.Banks4,32,4915,21,49621%14%72.1% RRBs63,68183,30731%22%11.5% Coop.Banks1,11,2031,18,4226%20%16.4% Total6,07,3757,23,22519%16%100% GROUND LEVEL CREDIT FLOW : TO Rs in crore

Cat.Sector % share Sh.TermCrop Loan (ST- Prod.Credit) 1,05,3502,76,6563,35,5503,96, % Long Term/ Inv. Credit Minor Irrigation ,363N.A. Land Development ,615N.A. Farm Mechanization ,800N.A. Plantation & Horticulture ,610N.A. Animal Husbandry ,773N.A. Fisheries ,931N.A. High-tech. agriculture ,774N.A. Others ,875N.A. Total ,68,2915,11,029100% Others include storage/market yards, forestry/waste land development, RIDF, bullock and bullock carts, bio-gas and credit flow through private sector commercial banks Purposewise Disbursement of Loans for Agriculture

Classification of Credit for Agriculture Classification based on tenure of loan Short-term Credit or Crop Loans: 6-18 months Medium term Credit : Above18 months, but less than 5 years (generally 3-5 years) Long term Credit : over 5 years upto years Classification based on purpose of loan Production Credit Investment Credit Marketing Credit Consumption Credit

Classification of Credit for Agriculture Classification based on security offered Mortgage Credit – Equitable mortgage/ Simple mortgage Hypothecation of assets - key loans and open loan Personal Security Loans Collateral Security Loans Unsecured loans Pledge Loans

Credit Appraisal for Agriculture Loan Return on investment – NPV, PW, IRR, BC ratio, opportunity cost, social cost-benefit analysis Repayment Capacity and tenure of loan Managing Risks in Agriculture Finance

Causes for the poor repayment capacity of Indian farmer 1.Fragmented land holding resulting in low production 2.Low production and productivity of the crops. 3. Need to meet family consumption expenditure. 4. Price/ weather fluctuation and occurrence of natural calamities 5. Diversion of credit for unproductive purposes 6. Low equity/net worth of farmers. 7. Lack of adoption of improved technology. 8. Lack of awareness about farming techniques and market information 9. Infrastructure constraints

Category of AdvancesDomestic Banks/ Foreign banks with 20 or more branches Other Foreign Banks Aggregate advances to priority sector 40 per cent of net bank credit 32 per cent of net bank credit Advances to agriculture18 per cent of net bank credit. indirect lending in excess of 4.5% of ANBC not considered as advances to Agriculture for this purpose. No Target Advances to weaker sections 10 per cent of net bank credit No Target Priority Sector Guidelines

Category of AdvancesDomestic BanksForeign Banks Advances to MSME No separate Target i. 40 per cent of total advances to micro and small enterprises sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs 5 lakh and micro (service) enterprises having investment in equipment up to Rs. 2 lakh; No target Priority Sector Guidelines

Category of Advances Domestic BanksForeign Banks Advances to MSME ii. 20 per cent of total advances to micro and small enterprises sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs 5 lakh and up to Rs. 25 lakh, and micro (service) enterprises with investment in equipment above Rs. 2 lakh and up to Rs. 10 lakh. (Thus, 60 per cent of micro and small enterprises advances should go to the micro enterprises). Priority Sector Guidelines

Category of Advances Domestic BanksForeign Banks Advances to MSMEiii. The increase in share of micro enterprises in MSE lending to 60 per cent should be achieved in stages, viz. 50 per cent in the year , 55% in the year and 60% in the year Priority Sector Guidelines

Category of Advances Domestic BanksForeign Banks Export FinanceExport finance not part of priority sector 12 per cent of net bank credit Differential Rate of Interest 1 per cent of net bank credit No Target Priority Sector Guidelines

Broadly, the activities/ purposes financed by banks included in priority sector are: Agriculture – direct and indirect Micro, Small and Medium Enterprises Small road and water transport operators Retail traders and small business operators Professional and self-employed persons State-sponsored organisations for Scheduled Caste/Scheduled Tribe, Loans to individuals up to Rs 25 lakh in metropolitan centres with population above ten lakh and Rs 15 lakh in other centres for purchase/construction of a dwelling unit per family excluding loans sanctioned to bank’s own employees. Loans for repairs to the damaged dwelling units of families up to Rs 2 lakh in rural and semi- urban areas and up to Rs 5 lakh in urban and metropolitan areas Bank loans to any governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to a ceiling of Rs10 lakh per dwelling unit. Loans sanctioned by banks for housing projects exclusively for the purpose of construction of houses only to economically weaker sections and low income groups (the family income limit of Rs.1,20,000 per annum, irrespective of location) the total cost of which does not exceed Rs.10 lakh per dwelling unit Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance, for on-lending for the purpose of purchase/construction/reconstruction of individual dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to an aggregate loan limit of Rs.10 lakh per borrower, provided the all inclusive interest rate charged to the ultimate borrower is not exceeding lowest lending rate of the lending bank for housing loans plus two percent per annum. Priority Sector Guidelines

Educational loans, upto Rs. 10 lakh for studies within the country and Rs. 20 lakh for studies abroad. Others Loans, not exceeding Rs 50,000 per borrower provided directly by banks to individuals and their SHG/JLG, provided the borrower’s household annual income in rural areas does not exceed Rs 60,000/- and for non-rural areas it should not exceed Rs.1,20,000/-. Loans to distressed persons not exceeding Rs 50,000 per borrower to prepay their debt to non-institutional lenders. Loans outstanding under loans for general purposes under General Credit Cards (GCC). If the loans under GCC are sanctioned to Micro and Small Enterprises, such loans should be classified under respective categories of Micro and Small Enterprises. Overdrafts, up to Rs 50,000 (per account), granted against basic banking / savings accounts provided the borrowers household annual income in rural areas does not exceed Rs 60,000/- and for non-rural areas it should not exceed Rs 1,20,000/-. Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes for the specific purpose of purchase and supply of inputs to and/or the marketing of the outputs of the beneficiaries of these organisations. Priority Sector Guidelines

Weaker Sections The categories of borrowers included under weaker sections are: Small and marginal farmers with land holdings of five acres and less, landless labourers, tenant farmers and sharecroppers; Artisans, village and cottage industries where individual credit requirements do not exceed Rs. 50,000 ; Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY), Swarna Jayanti Shahari Rozgar Yojana (SJSRY) and Scheme for Liberation and Rehabilitation of Scavengers (SLRS); Scheduled castes and scheduled tribes; Beneficiaries under the Differential Rate of Interest (DRI) scheme; Self Help Groups. Priority Sector Guidelines

1. DIRECT FINANCE A. Finance to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data on such finance] for Agriculture and Allied Activities (dairy, fishery, piggery, poultry, bee-keeping, etc.) 1 Short-term loans for raising crops, i.e. for crop loans. This will include traditional/non- traditional plantations and horticulture. 2. Medium & long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm, and development loans for allied activities). 3. Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce. 4. Loans to farmers up to Rs 50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, irrespective of whether the farmers were given crop loans for raising the produce or not. 5 Loans to small and marginal farmers for purchase of land for agricultural purposes. 6. Loans to distressed farmers indebted to non-institutional lenders, against appropriate collateral or group security. 7. Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS) ceded to or managed/ controlled by such banks for on lending to farmers for agricultural and allied activities. 8. Loans to farmers under Kisan Credit Card Scheme. 9. Export credit to farmers for exporting their own farm produce. Priority Sector – Direct Advances to Agriculture

B Loans to corporates including farmers' producer companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to cocoon stage) up to an aggregate limit of Rs 2 crore per borrower for the following activities: (i) Short-term loans to farmers for raising crops, i.e. for crop loans. This will include traditional/non-traditional plantations, horticulture and allied activities. (ii) Medium & long-term loans to farmers for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm, and development loans for allied activities). (iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, grading and sorting. (iv) Export credit for exporting their own farm produce. Priority Sector – Direct Advances to Agriculture

2.INDIRECT FINANCE 1. Loans to corporates including farmers' producer companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to cocoon stage) (i) If the aggregate loan limit per borrower is more than Rs 2 crore in respect of B above, the entire loan should be treated as indirect finance to agriculture. (ii) Loans up to Rs 50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, irrespective of whether the farmers were given crop loans for raising the produce or not. 2. Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS) other than those covered under 1(7) above. 3. Loans up to Rs. 5 crore per borrower to dealers /sellers of fertilizers, pesticides, seeds, cattle feed, poultry feed, agricultural implements and other inputs. Priority Sector – Indirect Advances to Agriculture

2.INDIRECT FINANCE 4. Loans for setting up of Agriclinics and Agribusiness Centres. 5. Loans up to Rs 5 crore to cooperative societies of farmers for disposing of the produce of members. 6. Loans to Custom Service Units managed by individuals, institutions or organizations who maintain a fleet of tractors, bulldozers, well-boring equipment, threshers, combines, etc., and undertake farm work for farmers on contract basis. 7. Loans for construction and running of storage facilities (warehouse, market yards, godowns and silos), including cold storage units designed to store agriculture produce/products, irrespective of their location. If the storage unit is a micro or small enterprise, such loans will be classified under loans to Micro and Small Enterprises sector. 8.Loans to MFIs for on-lending to farmers for agricultural and allied activities as per the conditions specified in paragraph VIII of this circular. 9.Loans sanctioned to NGOs, which are SHG Promoting Institutions, for on-lending to members of SHGs under SHG-Bank Linkage Programme for agricultural and allied activities. The all inclusive interest charged by the NGO/SHG promoting entity should not exceed the Base Rate of the lending bank plus eight percent per annum. 10. Loans sanctioned to RRBs for on-lending to agriculture and allied activities. Priority Sector – Indirect Advances to Agriculture

Micro and Small Enterprises Manufacturing sector EnterprisesInvestment in plant and machinery Micro EnterprisesDo not exceed twenty five lakh rupees Small EnterprisesMore than twenty five lakh rupees but does not exceed five crore rupees Service Sector Micro EnterprisesDoes not exceed ten lakh rupees Small EnterprisesMore than ten lakh rupees but does not exceed two crore rupees Bank loans to micro and small enterprises both manufacturing and service are eligible to be classified under priority sector as per the following: Direct Finance Manufacturing Enterprises The Micro and Small enterprises engaged in the manufacture or production of goods to any industry specified in the first schedule to the Industries (Development and regulation) Act, 1951 and as notified by the Government from time to time. The manufacturing enterprises are defined in terms of investment in plant and machinery. Loans for food and agro processing Loans for food and agro processing will be classified under Micro and Small Enterprises, provided the units satisfy investments criteria prescribed for Micro and Small Enterprises, as provided in MSMED Act, 2006.

Micro and Small Enterprises Direct Finance Service Enterprises 1. Bank loans up to Rs 5 crore per unit to Micro and Small Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, Export credit to MSE units (both manufacturing and services) for exporting of goods/services produced/rendered by them. Khadi and Village Industries Sector (KVI) All loans sanctioned to units in the KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery. Such loans will be eligible for classification under the sub-target of 60 percent prescribed for micro enterprises within the micro and small enterprises segment under priority sector.

Micro and Small Enterprises B. INDIRECT FINANCE UNDER MSME FINANCING Indirect finance to the micro and small (manufacturing as well as service) enterprises sector will include credit to: (i) Loans to persons involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries. (ii) Loans to cooperatives of producers in the decentralized sector viz. artisans village and cottage industries. (iii) Loans sanctioned by banks to MFIs for on-lending to MSE sector as per the conditions specified in paragraph VIII of this circular. Loans not eligible for classification as direct or indirect finance to MSE sector 1 Loans sanctioned by banks to State Financial Corporations for on-lending to micro and small enterprises. 2 Loans sanctioned w.e.f. April 1, 2011 to NBFCs (other than MFIs which adhere to the criteria specified ) for on-lending.