Overdues in Agriculture

"Financing the small and marginal farmers whose repaying capacity is obviously low is
indeed a formidable task in India. The institutional agencies like the co-operatives are
required to face this challenge if they have to prove their worth. Since many years the co-
operatives for financing agriculture in India have been facing the problem of overdues.
Besides they have not successfully accomplished the task of linking credit with
marketing. The problem of overdues in the co-operative credit sector is the result of a
variety of causes some of which may be attributed to the structural constraints which
Indian agriculture is experiencing.

Causes and impacts

Causes :
Rapid Expansion and Diversification.
The fast increase of commercial banks has created strains in the system. Due to this there
has been deterioration in quality of scheme preparation. Decreasing quality of lending is
also due to heavy workload of day to day house keeping without increase in supporting
staff.
Large no. of small advances.
The commercial banks have found sanctioning and monitoring of large no. of small
advances in their rural branches, time consuming and manpower intensive and high cost
proposition. Because of this banks have been found reluctant in posting sufficient
supervisory and other staff in rural branches.
Reduction of margin available.
Opening large no. of branches in rural area which do not have adequate business
potential, raise in establishment expenses, increasing nonperforming advances affected
profitability of banks adversely reducing margin available to company.
Bad recovery position.
The recovery position of banks is bad. The level of Overdues has been 30% or even
more. Therefore banking system is unable to provide more credit to meet the growing
needs of the farmers.
Multi-alternative credit system.
Commercial bank failed to serve those areas which are not covered by Co-operatives.
They tend to serve those areas which are served by cooperatives. States with deficient
rural credit system have not benefitted much. The real need was to make available only
one alternative source of credit whereas in reality the multiagency system has tended to
become multi alternative credit system.
Decline in credit deposit ratio.
It is important indicator of degree of involvement of banks in lending. Rural credit
deposit ratio has declined from 1.58% to 0.73% which shows that deposits mobilized
from rural India to elsewhere. In other words, rural India is financing the other sectors of
the economy.
Reduction of loan to small farmers.
Loan disbursal to small and marginal farmers has decelerated sharply in the 90s. The
option of investing in rural infrastructure fund and in SIDBI has reduced rate of growth
of direct finance to small farmers. The growth rate of direct finance to small farmers is
declined from 15.1% to 11.0%.
The working group on rural banks recommended establishment of Regional Rural Banks
to supplement the efforts of the commercial banks and cooperatives in extending their
credit to weaker sections of rural community.
The intention of having new banks that there should be an device which combined the
local feel and familiarity with the rural problems which the cooperatives possessed and
he degree of business organization and modernized look which commercial banks have.
Also the rural credit is to be provided at lower cost. The rural poor needed low cost low
profile institution into which they should walk freely. The staff of RRBs was to be
recruited from the neighboring area and such would have a better understanding of local
problems and local people their needs and their constraints.
, RRBs provided 15,223 crore as credit to Agriculture sector.8.5% of total institutional
credit to agriculture.
Evaluation:
Organizational Problem.
Each RRB is sponsored by Commercial bank. The central government and state govt.
also contribute to its capital. Thus there is multiagency control. This has contributed to
lack of conformity of its functions. Also lack of proper monitoring of by sponsor bank,
specific area of operation, lack of proper system and procedures within banks, lack of
adequate staff. Organizational problems compounded by unplanned and unwieldy growth
of banks and branches opened under pressure from Govt.
Problems of recovery
Recovery position of RRBs is bad. There recovery varied between 51% to 61%. Thus
Overdues varied from 39% to 49%. This is due to defective loaning policy, apathy
towards recovering, political interference, willful default etc.
Mounting losses leading to Non-Viability.
150 out of 196 RRBs had shown losses in 2005-06. Many had completely wiped out there
equity and reserves. This is indeed unsustainable situation. RRBs serve those sections
where the interest earned is lowest. Low margins coupled with high cost of service.
Opening of too much RRBs added high overhead costs without increase in income. Non
availability of competent staff.
Management Problems.
Since RRBs are district level small institution, the sponsor banks have been deputing only
middle management staff to run them. Such staff finds it difficult to take decision in new
environment. Meeting of board of directors are not held regularly and large no. of official
members does not show much interest in the working of banks. Multiagency control
creates many problems.
Reforms
To solve problems of RRBs, and improve their viability, efforts have been made in recent
years such as
v Efforts have been made to restructure the operations of RRBs.
v Reduction of RRBs from 196 to 96 to get advantage of economies of scale.
v Infuse fresh capital in them.
v Greater flexibility in their operations.
v Allowance to target only 40% to advances to priority sector. Placing RRBs at par
with commercial banks.

Impact :