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RURAL BANK

A rural bank is a financial institution that helps rationalise the developing regions or developing country to finance their needs specially the projects regarding agricultural progress. In other words, a rural bank is actually just a normal bank but one that caters to the needs of the rural public in India's villages. Majority of the population in rural India do not have banking facilities and still don't have a bank account. These rural banks provide banking services to the rural citizens and help them save money effectively.

DIFFERENCE BETWEEN COMMERCIAL BANK AND RURAL BANK.

Actually the services provided by a commercial bank and a rural bank are the same. They both provide bank accounts, accept deposits, grant loans etc. to its customers. The only difference between the two is the population they serve. Commercial banks serve the general population of the country that lives in cities and towns whereas the rural bank serve the customers from the rural villages of the country.

FUNCTIONS OF RURAL BANK

A rural bank may offer or perform any or all of the following services :

1. grant loans and make investments in accordance with existing rules and regulations.

2. accept deposits (both savings and time)

3. sell domestic drafts.

4. act as agent for other financial institutions.

5. receive in custody funds, documents, and other valuable objects, and rent safety deposit boxes for the safe guarding of such objects.

6. act as financial agent, buy and sell, by order of and for the account of its customers, shares, evidences of indebtness and all types of securities.

7. make collections and payments for the account of others and perform such other services for its customers as are not incompatible with banking business.

With the objective of developing rural economy, Regional Rural Banks (RRBs) were set up by the government of India on Oct 2,1975.

REGIONAL RURAL BANKS (RRBs)

Regional Rural Banks were set by the state government and the sponsoring commercial banks with the objective of developing the rural economy. Regional rural banks provide banking services and credit to small farmers, small entrepreneurs in the rural areas. The regional rural banks were set up with a view to provide credit facilities to weaker sections. They constitute an important part of the rural financial architecture in India. There were 196 RRBs at the end of June, 2002, as compared to 107 in 1981 and 6 in 1975.

Till date in rural banking in India, there are 14,475 rural banks in the country of which 2126(91%) are located in remote rural areas.

There are several concessions enjoyed by the RRBs by Reserve Bank of India such as lower interest rates and refinancing facilities from NABARD like lower cash ratio, lower statutory liquidity ratio (SLR), lower rates of interest on loans taken from sponsoring banks, managerial and staff assistance from the sponsoring bank and reimbursement of the expenses on staff training. The RRBs are under the control of NABARD. NABARD has the responsibility of laying down the policies for the RRBs, to oversee their operations, provide refinance facilities, to monitor their performance and to attend their problems.

Government decided to restructure the RRBs on the recommendation of Bhandari Committee in 1994-95 . As a result, an amount of Rs 360 crores was allocated towards the restructuring programme. The State Bank of India took several measures of managerial and financial restructuring including enhancement of issued capital and placements of officers of proven ability to head the RRBs. The Government of India released Rs 1867.65 crores between 1994-98 for the recapitisation of RRBs. 175 out of total of 196 RRBs were fully recapitalised by 1998-99.

NABARD took several policy measures such as quarterly / half yearly review of RRBs by the sponsor banks, framing of Appointment and Promotion Rules (1998) for the staff of RRBs, introduction of Kissan Credit Cards, introduction of self-help groups etc. for improving the overall performance of RRBs.

In order to strengthen and consolidate RRBs, the government in 2005 initiated the process of amalgamation of RRBs in a phased manner.

Consequently, the total number of RRBs has reduced from 196 to 82 as on March 31,2010.

NABARD (NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT)

RBI had been taking keen interest for the promotion of agricultural credit. It provided short-term seasonal credit as well as medium term and long-term credit to agricultural sector through land development banks and state level cooperative banks. RBI set up ARDC Agricultural Refinance Development Corporation in order to promote programmes of agricultural development. It also extended refinance support to ARDC, who in turn extends support to the banks extending term credit for agricultural development.

With the widening of the role of bank credit from 'agricultural development ' to 'rural development '', a need was felt for the setting-up of an organisation at the apex level who will provide support and give guidance to credit institutions in matters relating to the formulation and implementation of rural development programmes. RBI established a committee, under the chairmanship of Mr.Shiraraman in March, 1979 to study the problem of rural credit. On the recommendations of this committee National Bank for Agricultural and Rural Development was established as an Apex Bank to takeover the functions of RBI in respect of agricultural credit on one hand and the refinance functions of ARDC on the other. The bank plays an important role in context of agricultural and rural development.

Resources of NABARD

NABARD was established on July 12,1982 as an apex banking institution by an Act of Parliament. Initially, it was set up with an authorised capital of Rs 500 crore and with paid-up capital of Rs 100 crores having 50:50 contribution of Central Government and the Reserve Bank. NABARD (Amendment) Bill 2000 was accepted by the president in January 2001. Under this Act, the authorised capital has been raised from Rs 500 crore to Rs 2000 crore. To meet its loan requirements, NABARD obtains funds from Government of India, World Bank and other agencies. It also mobilises funds by issuing bonds and debentures guaranteed by the Union Government. It also uses the funds of National Agricultural Fund. It's short-term credit and working capital requirements are met by RBI. NABARD receives funds for the implementation of the projects financed by World Bank and IDA.

There has been significant increase in the resources of NABARD in recent years due to increase in its paid-up capital, issues of tax-free bonds, increase in deposits under the Rural Infrastructure Development Fund (RIDF) by commercial banks. During the year 2004-05 , a total of Rs 8843 crore were raised as compared to Rs 5334 crore in 2003-04.

Management

Deputy Governor of RBI has been appointed as the chairman of NABARD. The Board of National Bank includes three Central Board of Directors being nominated by the Government :

Functions

Its main functions include

(1) to refinance the loans granted by the State Government, State Co-operative Bank, Land Development Bank, Regional Rural Bank and other financial institutions for purposes of rural development.

(2) to perform all the functions relating to agricultural credit (earlier bring performed by RBI)

(3) to execute /implement rural development programmes funded by the World Bank and other International Development Agencies.

(4) to co-ordinate the activities of Central and State Governments, the Planning Commission and other institutions involved with the development of SSIs, village and cottage industries etc.

(5) to extend long-term loans to State Governments to enable them to subscribe to the share capital to co-operative credit societies .

(6) to provide loans to commercial banks and RRBs for refinance purpose so that these banks may continue their various activities including granting finances for small irrigation ,IRDP , dairy development, mechanization of farms etc .

(7) to promot research in agriculture and rural development , to formulate and design projects and programmes to suit the requirements of different areas .It maintains a Research and Development Fund for the above said purposes.

Thus, NABARD is the single institution that meets the credit needs of all types of agriculture and rural development activities.

NABARD operates throughout the country through its 28 Regional offices and one sub-office located in the Capital of all the states/union territories .It has 36 District Officers across the country, one sub-office at Port Blair and one Special Cell at Srinagar .It also has 6 training establishments.

Financing Activities

NABARD provides refinance assistance for short-term and medium term to State Cooperative Banks and RRBs. It also provides refinance assistance for long-term purposes to State Governments in order to enable them to subscribe to the share capital of primary agricultural co-operative societies (PACSs). Table 1 shows the agency - wise non-farm assistance provided by NABARD. By the end of March 2003 , NABARD extend a total of Rs 1891.8 crores to commercial banks , Rs 3277.8 crores to State Co-operative Agricultural and Rural Development Banks, Rs 1798.7 crores to State Co-operative Banks, Rs 2098.8 crores to RRBs, and Rs 82.7 crores to Scheduled Primary (urban) Co-operative Banks.

PRODUCTWISE NON-FARM REFINANCE ASSISTANCE

NABARD renders refinance assistance for the construction of small and medium scale loans. Table2 given below depicts that Rs 769.5 crore were sanctioned and disbursed for rural housing during 2002-2003 out of the total of Rs 2007.4 crore . Rs 131.2 crores were allocated to small road and water, transport operators scheme.

INDUSTRY-WISE ASSISTANCE

The National Bank acts as a refinancing institution for all kinds of production and investment credit to agriculture, small-scale industries , cottage and village industries , handicrafts and rural crafts and real artisans and other allied economic activities with a view to promote integrated rural development. The industry-wise non-farm assistance rendered by NABARD includes refinance provided for raw material and marketing centres, godowns/warehouses/show rooms, common facility centres, transport vehicles , marketing outlets, consultancy and other service activities.

@Includes refinance provided for handicrafts, village industries, potteries, glass ceremics, construction/building materials, general engineering, electronics/auto engineering , tailoring , readymade items, sports goods, stationery items, coir, printing&book binding and other miscellaneous industries.l

Purpose-wise Refinance Assistance

NABARD has been focusing its attention towards minor irrigation works, since its inception, which increased to 24 percent during 1992-93 . Farm mechanism occupied around 28 percent of total refinance. NABARD renders refinance assistance under its IRDP programme to help weaker sections of rural community.

It provides refinance for daily development , minor irrigation, sheep/goat/piggery rearing, fisheries, small business, plantation and horticulture, sheep breeding, land development , command area development (CAD) etc.

Credit Operations

Various credit operation activities of NABARD during 2004-05 include the following :

1. Short term Credit limits Sanctioned.

(a) For SCRs, RRBs - seasonal agricultural operations - Rs 10185.6 crore were sanctioned.

(b) For RRBs- Other than seasonal agricultural operations - Rs 216.83 crore were sanctioned .

(c) For SCBs - Financing Weaver's Cooperative Societies - Rs 349.89 crore were sanctioned.

2. Long term loans Sanctioned to 7 State Governments for contribution to the Share Capital of co-operative credit institutions aggregated RS 32.98 crore.

3. Liquidity Support includes.

(a) To SCBs - Rs 1914.24 Crore.

(b) To RRBs - Rs 158.78 Crore.

4. Investment Credit. extended by NABARD to various commercial Banks, State Co-operative Agricultural and Rural Development Banks (SCRADBs) , State Co-operative Banks (SCBs), Regional Rural Banks (RRBs) and other eligible institutions stood at the figure of Rs 7605.29 Crore.

Farm Sector Schemes

NABARD has played an important role in the development of rural sector. It has introduced several new schemes in order to enhance the flow of rural and agricultural credit. NABARD provides policy support for various farm sector initiatives .It has taken number of steps to increase flow of credit by rural credit agencies for various farm related activities. NABARD has helped in increasing agricultural production and productivity generating rural employment , managing natural resources and eliminating rural poverty by extending credit and grant support.

Kisan Credit Card Scheme

In 1998-99 , the Union Finance Minister asked NABARD to formulate a Model Scheme for issue of Kisan Credit Cards to farmers , on the basis of their land holdings, for uniform adoption by banks, so that the farmers may use them as and when required to purchase agricultural inputs such as seeds, fertilizers, pesticides etc. and also draw cash for their production needs . As a result, NABARD formulated a Model Kisan Credit Card Scheme in consultation with major banks. The Model Scheme was circulated by RBI to commercial banks and by NABARD to cooperative banks and RRBs in August 1998. Banks were instructed to provide adequate and timely support to farmers for their cultivation need including purchase of inputs in a flexible and cost effective manner .During the year (upto February,2005), 70.43 lakh cards were issued by co-operative banks , RRBs and commercial banks. Since inception in 1998-99, 4.84crore kisan credit cards have been issued.

Rural Infrastructure Development Fund (RIDF)

On April 1,1995 , the Government of India set up a new fund called 'Rural Infrastructural Development Fund' with a corpus of Rs 2000 crore. Under the scheme, domestic commercial banks contribute to the Fund to the extent of their shortfall in their lending to the priority sectors. With successive budget, the Indian Government continued RIDF, designating as RIDF-1, RIDF-2 and so on. The main objective of the Fund is to provide loans to State Governments and State owned corporations to enable them to complete on-going rural infrastructure projects. The Fund is being operated by the National Bank.

Cumulative sanctions and disbursements under RIDF or 1-11 amounted to Rs 34,678 crore and Rs 21,067 crore respectively at the end of March, 2004. As on March 31,2004 RIDF loans amounting to Rs 14,004 crore were outstanding from various State Governments. Under utilisation of funds under RIDF depicts the incompetency of the State Governments in getting various infrastructural projects prepared and in implementation.

Concerned over the significant shortfalls in the disbursal of RIDF funds, the scope of RIDF lending was extended to cover soil conservation, rural market yards, in land water ways, fish Jetties, cold storages, godowns etc. Recently, rural health centres, primary school buildings, mini hydel plants, city information centres under information technology, irrigation projects and rural roads have been added. Government of India advised NABARD to sanction loans for projects which directly benefit the farmers under RIDF-9 was allocated for irrigation, flood protection, agriculture, mini hydel projects and allied activities.

Interest rates on loans under RIDF had been reduced from 13.0 percent in 1995-96 to 11.5 percent in 2000-01 and further to 8.5 percent in 2002-03. As a result, the lending rates in respect of undisbursed amount of RIDF 4 to 9 were restructured w. e. f. November 1,2003 with the approval of RBI. Assistance under RIDF has resulted in the addition of 78.8 lakh hectares of irrigation potential and 1,46,535 kilometrers of roads by the end of November, 2003.

Agricultural Infrastructure and Credit Fund

An agricultural Infrastructure and Credit Fund also called Lok Nayak Jai Prakash Narayana Fund (LNJPNE) was set up with NABARD with a corpus of Rs 50,000 crore spread over three years (April 2004 to March 2007). The objective of the Fund is to create mechanism for efficiently aggregating resources from various providers of long term financing, facilitating resources flow from the market and channelising for agricultural/rural infrastructure creation. The Fund will thus be utilized for enhancing the efficiency, productivity and profitability of Indian agriculture so as to augment the income of rural households by strengthening infrastructure necessary for agriculture, agri-exports, diversification and value addition. With the operationalisation of LN JPNF it was decided to discontinue the RIDF mechanism. But the regular Budget presented on July 8,2004 proposed revival of RIDF with s corp is of Rs 8000 crore during 2004-05. According, RIDF is currently under implementation.

Out of 1,36,486 projects sanctioned under RIDF 1 to 8. 84,584 projects sanctioned under RIDF 1 to 8. 84,584 projects have been completed. During the current year till December 31,2004 sanctions and disbursements under RIDF 10 amounted to Rs 3048 crore and Rs 52 crore respectively. The short falls in disbursements of RIDF funds as compared to sanctions continue to remain a matter of concern in the implemention of RIDF. The Government has taken a number of steps to address this problem. The scope of RIDF has been widened to include activities such as drinking water schemes, social conservation, rural market yards, rural health centres and primary schools, mini hydel plants, shishu shiksha kendras, aganwadis, and system improvement in the power sector.

Activities to be financed under RIDF 10.

The activities to be financed under RIDF 10 include minor irrigation projects/micro irrigation, flood protection, watershed development /reclamation of water logged areas, drainage, forest development, market yard /godown, apni mandi, rural haats and other marketing infrastructure cold storage seed /agricultural/horticulture farms, plantation and horticulture, granding and certifying mechanisms such as testing and certifying laboratories etc. community irrigation wells for irrigation purposes for the village as a whole, fishing harbour /jetties, riverine fisheries, animal husbandry and modern abattoir.

The rate of interest for the deposits made by the contributing banks in RIDF has been lowered as a measure of disincentive for non-achievement of the agricultural lending target, and is charged in inverse proportion to the extent of short fall in the agricultural lending vis-a-vis the stipulated target of 18 percent.

RIDF 11

Government of India announced Rs 8000 crore for RIDF 11 (2005-06). As at the end of March 2005, RIDF sanctions under all the transches of RIDF amounted to Rs 42948.51 crore against which the disbursements were Rs 25384.02 crore.

Financial highlights

NABARD was set up under an Act of Parliament NABARD Act, 1981 and has a special base of Rs 2000 crore contributed by RBI and Government of India. As at 31st March, 2004 the highlights are as follows :

(a) Total Assets stood at Rs 55889 crore out of which owned funds amounted to Rs 22660 crore.

(b) Net Profit before tax stood at Rs 1460 crore.

(c) A high Capital Adequacy Ratio of 39.41% as against a minimum of 9% stipulated by RBI.

(d) Non-performing Assets are as low as 0.0014% of advances as on 31-03-04.

Self Help Group (SHG) Linkage Programme.

During the period April 2004 to March 2005 - 5,39,385 new SHGs were financed by banks to a tune of Rs29.94 billion by way of loans. Commulatively, banks have lent Rs 68.98 billion to 16,18,476 SHGs 35294 branches of 560 banks (commercial banks -48, Regional Rural districts 196, & Co-operative banks-316) situated in 563 districts in the 30 states of the country are participating in the programme. About 24.25 million poor households have gained access to formal banking system through SHG linkage programme. scary.