agricultural marketing and rural financing in india – status, issues and prospects
TRANSCRIPT
Agricultural Marketing and Rural Financing in India –Status, Issues and Prospects
Dr. Vinay Kandpal, Prof P C KavidayalAssistant Professor, Department of Accounting & Finance, Professor& Head, College of Management & Economic Studies, Departmentof Management StudiesUniversity of Petroleum & Energy Studies, Dehradun Bhimtal(Uttarakhand)Email: [email protected], Email:[email protected] No: +91-7417012388 Contact No: +91-9412985896
Abstract
In countries like India, strengthening of agriculture is critical
for facing the challenges of rural poverty, food insecurity,
unemployment and sustainability of natural resources. But, there
is a need to redefine agriculture as the science and practice of
activities relating to production, processing, marketing,
distribution, utilization and trade of agricultural products
which implies that agricultural development strategy must address
not only farmers but also those in marketing, trade, processing
and agri-business. In this context, efficient marketing and rural
credit systems assume added importance. Agricultural Marketing is
a process which starts with a decision to produce a saleable farm
product and involves all aspects of market structure or system,
both functional and institutional, based on technical and
economic consideration. Though agricultural marketing is a State
subject, the Government of India has an important role to play in
laying down general policy framework, framing of quality
standards, conducting survey and research studies and in
providing guidance, technical and financial support to the State
Governments. Rural credit system assumes importance because for
most of the Indian rural families, savings are inadequate to
finance farming and other economic activities. To achieve the
objectives of production and productivity, the stance of policy
towards rural credit was to ensure provision of sufficient and
timely credit at reasonable rates of interest to as large a
segment of the rural population as possible.
Keywords: Rural, credit, sustainability, segment, Agriculture
Introduction:
This paper is an attempt for a larger study aimed at
strengthening policy reforms in the area of agriculture, food
security and rural development. There is growing consensus on the
need to accelerate the pace of reforms in the agriculture sector
if the sector is to sustain a growth rate of about four per cent
per annum. Government policies in relation to agriculture
marketing have moved considerable distance away from the
restrictive regulations of the sixties and seventies, dominated
by the excessive and needless use of the Essential Commodities
Act and other restrictive laws. However, Government policy and
the legal framework still continue to be restrictive, despite an
overwhelming body of evidence that further freeing of markets
provide huge direct and indirect benefits to both farmers as well
as to other stakeholders. The rapid growth in organized retail
during last decade has seen increased attention both by the media
as well as elected representatives. Critics fear that organized
retail will be to the detriment of the large multitude of small
retailers. These fears, however, appear to be largely misplaced
as the retail space that would be occupied by the large
corporates in the foreseeable future would remain insignificant.
The benefits of organized retail in promoting employment and
improving efficiencies along the entire agriculture value chain
will outweigh whatever loss of income or unemployment that some
of those currently engaged in retail trade may have to bear. In
countries like India, strengthening of agriculture is critical
for facing the challenges of rural poverty, food insecurity,
unemployment and sustainability of natural resources. But, there
is a need to redefine agriculture as the science and practice of
activities relating to production, processing, marketing,
distribution, utilization and trade of agricultural products
which implies that agricultural development strategy must address
not only farmers but also those in marketing, trade, processing
and agri-business. In this context, efficient marketing and rural
credit systems assume added importance. Agricultural Marketing is
a process which starts with a decision to produce a saleable farm
product and involves all aspects of market structure or system,
both functional and institutional, based on technical and
economic consideration. Though agricultural marketing is a State
subject, the Government of India has an important role to play in
laying down general policy framework, framing of quality
standards, conducting survey and research studies and in
providing guidance, technical and financial support to the State
Governments. The Central Government is aided and advised by two
organizations under its control, namely, the Directorate of
Marketing and Inspection (DMI) and the National Institute of
Agricultural Marketing (NIAM), Jaipur.
Rural Credit: Rural credit system assumes importance because for
most of the Indian rural families, savings are inadequate to
finance farming and other economic activities. It is well known
that the burden of indebtedness in rural India is very great, and
that despite major structural changes in credit institutions and
forms of rural credit in the post-Independence period, the
exploitation of the rural masses in the credit market is one of
the most pervasive and persistent features of rural life in
India. Rural households need credit for a variety of reasons.
They need credit to meet short-term requirements of working
capital and for long-term investment in agriculture and other
income-bearing activities. Agricultural and non-agricultural
activities in rural areas typically are seasonal, and households
need credit to smoothen out seasonal fluctuations in earnings and
expenditure. Rural households, particularly those vulnerable to
what appear to others to be minor shocks with respect to income
and expenditure, need credit as an insurance against risk. Rural
households need credit for different types of consumption. These
include expenditure on food, housing, health and education. In
the Indian context, another important purpose of borrowing is to
meet expenses on a variety of social obligations and rituals. If
these credit needs of the poor are to be met, rural households
need access to credit institutions that provide them a range of
financial services, provide credit at reasonable rates of
interest and provide loans that are unencumbered by extra-
economic provisions and obligations. The strategy devised for the
purpose rested on three pillars: of the institutional structure,
directed lending to disadvantaged borrowers and sectors and lower
interest rates.
Journey of Rural Credit in India: The evolution of institutional
credit to agriculture could be broadly classified into four
distinct phases - 1904-1969 (predominance of co-operatives and
setting up of RBI), 1969-1975 [nationalization of commercial
banks and setting up of Regional Rural Banks (RRBs)], 1975-1990
(setting up of NABARD) and from 1991 onwards (financial sector
reforms). The genesis of institutional involvement in the sphere
of agricultural credit could be traced back to the enactment of
the Cooperative Societies Act in 1904. The establishment of the
RBI in 1935 reinforced the process of institutional development
for agricultural credit. The RBI is perhaps the first central
bank in the world to have taken interest in the matters related
to agriculture and agricultural credit, and it continues to do so
(Reddy, 2001). The institutional vehicles for the Rural Credit
initially were cooperatives, commercial banks and Regional Rural
Banks (RRBs).
Between 1950-69, the emphasis was on the promotion of
cooperatives, followed by a concerted push by commercial banks
during the post nationalization period to establish branches in
the rural areas and the creation of new institutional structures
- RRBs in 1970s, NABARD in the 1980s and Local Area Banks in the
late 1990s. During this period, policy intervention at the macro
level was considered necessary to overcome factors which were
perceived as discouraging the flow of rural credit namely, high
cost of servicing, geographically dispersed customers, lack of
trained and motivated rural bankers etc. The Central Bank’s
policy response consisted of social control and nationalization,
expansion of branch network into unbanked and under banked areas,
evolution of Lead Bank Scheme and area approach, enunciation of
concept of targets for priority sector and weaker section lending
and special credit cum subsidy programmes for the poorer sections
of rural and urban areas. Reaching credit at concessional rates
was one of the important elements of the strategy for deployment
of rural credit. The justification for offering credit at
concessional rates to certain categories of borrowers was based
on the argument that farm based investment activity in the short
run does not always yield a return which enables regular
servicing of loans and at the same time meet the minimum
consumption requirements. Since concessional lending impacted the
profitability of rural financial institutions [RFIs], a policy of
cross subsidization and refinance from the RBI and later NABARD
was put in place simultaneously.
In 1991, i.e. on the eve of reforms, the rural credit
delivery system was in poor shape. The basic aim of the financial
sector reforms was to improve the soundness, efficiency and
productivity of all credit institutions, including rural credit
institutions whose financial health was far from satisfactory.
The reforms sought to enhance the areas of commercial freedom,
increase their outreach to the poor and stimulate additional
flows to the sector. The reform programme also included far
reaching changes in the incentive regime through liberalizing
interest rates for cooperatives and RRBs, relaxing controls on
where, for what purpose and whom rural financial institutions
[RFIs] could lend, introducing prudential norms and restructuring
and recapitalizing of RRBs. As a result of the reform process,
the financial health of commercial banks has improved in terms of
parameters such as capital adequacy, Non Performing Loans and
return on assets consistent with international standards for
classification of advances and prudential norms being applied in
almost all areas. However, commercial banks being more focused on
profitability tend to cherry pick and give comparatively less
priority to marginal and sub-marginal farmers. The verdict on the
100 years old cooperatives is equally clear. Despite being the
dominant purveyors of production and investment credit, their
share has steadily declined over time. As on date, they face
serious problems of governance, solvency and operational
efficiency. A large segment of the Co-operative Credit structure
is multi-layered, undercapitalized, overstaffed and under-
skilled, often with mounting non-performing assets coupled with
erosion of public deposits in certain cases. As regards RRBs,
barring a few, most have “turned around” but are often
characterized as ‘investment’ rather than credit institutions and
are perceived to have deviated from the mandate of serving the
poor and disadvantaged. Overall, the concerns in relation to
rural credit – other than those relating to structural issues -
are generally expressed in terms of:
Inadequacy of credit
Constraints on timely availability of credit
High interest rates
Neglect of small and marginal farmers,
Low credit-deposit ratios in several states and
Continued presence of informal markets.
Development of rural sector is largely dependent on the
availability of financial services in the area. Insuring proper
reward for the deposits by the people as well as reasonable cost
for the credit available to them would be an important issue. In
the rural areas, where formal financial institutions are not
performing these jobs, the informal institutions such as
indigenous money-lenders are operating and in those areas, low
rates of return on the savings as well as high cost of borrowings
are the common features. Though there are approaches which
sometimes justify the higher rate of borrowings charged by those
informal institutions by propagating the idea of monitoring cost
or the cost of better information, but whatsoever be the
justification, high cost of borrowings causes the development of
rural sector to be adversely affected. In this context Kumar
(2004) has emphasized the financial reform and the interest rate
de-regulations for the lack of motivation of the commercial banks
towards the credit delivery in rural areas.
Status and Major Issues of Agricultural Marketing
Prior to independence, farmers, while selling their produce to
traders, suffered from faulty weighing and manipulation of
accounts. Farmers who did not have the required information on
prices prevailing in markets were often forced to sell at low
prices. They also did not have proper storage facilities to keep
back their produce for selling later at a better price. Even
today, more than 10 per cent of goods produced in farms are
wasted due to lack of storage. Therefore, state intervention
became necessary to regulate the activities of the private
traders.
Let us discuss four such measures that were initiated to
improve the marketing aspect. The first step was regulation of
markets to create orderly and transparent marketing conditions.
By and large, this policy benefited farmers as well as consumers.
However, there is still a need to develop about 27,000 rural
periodic markets as regulated market places to realize the full
potential of rural markets. Second component is provision of
physical infrastructure facilities like roads, railways,
warehouses, godowns, cold storages and processing units. The
current infrastructure facilities are quite inadequate to meet
the growing demand and need to be improved. Cooperative
marketing, in realizing fair prices for farmers’ products, is the
third aspect of government initiative. The success of milk
cooperatives in transforming the social and economic landscape of
Gujarat and some other parts of the country is testimony to the
role of cooperatives. However cooperatives have received a
setback during the recent past due to inadequate coverage of
farmer members, lack of appropriate link between marketing and
processing cooperatives and inefficient financial management. The
fourth element is the policy instruments like (i) assurance of
minimum support prices (MSP) for agricultural products
(ii) maintenance of buffer stocks of wheat and rice by Food
Corporation of India and (iii) distribution of
food grains and sugar through PDS. These instruments are aimed at
protecting the income of the farmers and providing food grains at
a subsidized rate to the poor. However, despite government
intervention, private trade (by moneylenders, rural political
elites, big merchants and rich farmers) predominates agricultural
markets. The need for government intervention is imminent
particularly when a large share of agricultural products, is
handled by Private Player
Emerging Alternate Marketing Channels: It has been realized that
if farmers directly sell their produce to consumers, it increases
their incomes. Some examples of these channels are Apni Mandi
(Punjab, Haryana and Rajasthan); Hadaspar Mandi (Pune); Rythu Bazars
(vegetable and fruit markets in Andhra Pradesh) and Uzhavar Sandies
(farmers markets in Tamil Nadu). Further, several national and
multinational fast food chains are increasingly entering into
contracts/ alliances with farmers to encourage them to cultivate
farm products (vegetables, fruits, etc.) of the desired quality
by providing them with not only seeds and other inputs but also
assured procurement of the produce at predecided prices. It is
argued that such arrangements will help in reducing the price
risks of farmers and would also expand the markets for farm
products.
Market Yards and Market Places
Actual buying and selling of commodities mainly takes place in
market yards and sub-yards (primary and secondary wholesale
markets) and rural periodic markets/haats spread throughout the
country. At present, there are 2354 main market yards, 4807 sub-
market yards and 27294 rural periodic markets in the country.
These are managed by Agricultural Produce Market committees
(representing farmers and other stakeholders), local self-
government institutions or government departments. The users of
these markets, mostly buyers, have to pay a fee to the managers
of these market places. Facilities in these market places vary
extensively. Nearly two-thirds of market yards and sub-yards were
laid out on vast land area with such facilities as auction
platforms, shops, godowns, rest houses and parking lots. However,
studies have shown that facilities available in these yards are
considerably short of the requirements. Further, nearly 85
percent of 27294 rural periodic market places have very little or
almost no facilities for trade to take place efficiently.
Marketing Institutions
Another important structural characteristic of market structure
for agricultural commodities is the institutional infrastructure
created/promoted by the government for improvement of marketing
system. Depending on the objectives and role, the marketing
institutions can be grouped into public sector organizations,
cooperatives and other formal/informal bodies. Public sector
organizations include Food Corporation of India (FCI); Cotton
Corporation of India; Jute Corporation of India; Commodity
Boards; APEDA; STC; MPEDA; Commission for Agricultural Costs and
Prices; Directorate of Marketing and Inspection; Departments of
Food and Civil Supplies; State Agricultural Marketing Boards;
Central and State Warehousing Corporations; and Agricultural
Produce Market Committees. The role and functions of each of
these differ and include policy formulation, implementation,
supervision, facilitation and direct entry in the market
Credit Market in India – Status and Major Issues
Rural financial market development is a complex process. The
creation of the formal credit structure for financial agriculture
and other rural activities commenced in India in the early part
of this century with the introduction of co-operatives. It
received a big push during the plan era. The All India Rural
Credit Survey Committee (AIRCS) (1954) forms the edifice for the
policy towards the development of the Institutional credit
structures. The committee highlighted the awful inadequacy in the
supply of institutional credit to the rural sector and proposed
an integrated scheme of reorganization many more committees and
recommendations. Priority sector lending, lead bank scheme,
services area approach, setting up of NABARD, are some of the
outcomes of the repeated scrutiny of the system.
Coming to the recent committees, the Agriculture Credit Review
Committee (ACRC) (1989), examined the existing rural credit
system in detail. It highlighted the yawning gap between income
generated and costs incurred by rural credit institutions,
necessitating external assistance. The committee recommended
greater autonomy for commercial banks; the weakness of RRBs were
seen as endemic to the system with non-viability built into them.
Co-operatives were sought to be strengthened through thrust on
deposit mobilization and reduction of political interference. The
Narsimham Committee on Financial Sector Reforms 1991, among other
things, recommended a redefinition of priority sector, gradual
phasing out of directed credit programmes to 10% of aggregate
bank credit and deregulation of interest rates.
Looking at the situation today, the exercises seem to have
resulted in a scenario where "an imposing superstructure of
credit institutions has been built which one committee after
another has kept reshuffling or adding to" (Dandekar, 1993).
Commenting broadly on the exercise in developing countries (to
which the India experience seems to be no exception), Braveman
and Guasch, 1986, see most of the changes in institutional design
as largely superficial, window dressing type rather than
substantial. "The institutions have been perceived more like a
welfare agency than a commercial undertaking. There seems to be
little effort to integrate deposit taking activities or to
generate saving mobilization-a vital activity for the long run
success of a credit institution. No provisions were made to deal
with non-compliance, or to implement a reasonable system of
incentives to both lenders and borrowers to induce the desired
objectives.
The trend in submitting the Management Information System by
banks has shown improvement.
In 2009-10 all 27 Public Sector Commercial Banks, 19 private
sector Commercial Banks, 81 Regional Rural Banks and 318 Co-
operative Banks have submitted the MIS. The major support
provided by NABARD under Micro Finance Development and Equity
Fund relates to promotion and nurturing of SHGs by Self Help
Promoting Institutions and training and capacity building of the
stakeholders in the Sector. NABARD is also experimenting
innovative projects for further developing the Micro Finance
through Joint Liability Groups.
Since 2006-07, NABARD has been compiling and analyzing the
data on progress made in microfinance sector, based on the
returns furnished by Commercial Banks (CBs), Regional Rural Banks
(RRBs) and Cooperative Banks operating in the country. The banks
operating, presently, in the formal financial system comprise
Public Sector CBs (27), Private Sector CBs (22), RRBs (82), State
Cooperative Banks (31) and District Central Cooperative Banks
(370). Most of the banks participating in the process of
microfinance have reported the progress made under the programme.
As on 31 March 2010, a total of 69.53 lakh SHGs were having
saving bank accounts with the banking sector with outstanding
savings of Rs. 6198.71 crore as against 61.21 lakh SHGs with
savings of Rs. 5545.62 crore as on 31 March 2009, thereby showing
a growth rate of 13.6 per cent and 11.8 per cent, respectively.
Thus, more than 97 million poor households were associated with
banking agencies under SHG-Bank Linkage Programme. As on 31 March
2010, the CBs lead with savings accounts of 40.53 lakh SHGs
(58.3%) with savings amount of Rs 3673.89 crore (59.3 %) followed
by RRBs having savings bank accounts of 18.21 lakh SHGs (26.2%)
with savings amount of Rs. 1299.37 crore (21.0%) and Cooperative
Banks having savings bank accounts of 10.79 lakh SHGs (15.5 %)
with savings amount of Rs. 1225.44 crore (19.8%). The share under
SGSY was 16.94 lakh SHGs with savings of Rs. 1,292.62 crore
forming 24.4 per cent of the total SHGs having savings accounts
with the banks and 20.8 percent of their total savings amount.
During the year under review, the average savings per SHG with
all banks had marginally decreased from Rs. 9,060 as on 31 March
2009 to Rs. 8,915 as on 31 March 2010. The decrease may be due to
proper utilization of saving amount by SHGs for internal lending.
It varied from Rs. 11,352 per SHG with co-operative banks to Rs.
7,136 per SHG with RRBs. As on 31 March 2010, the share of women
SHGs in the total SHGs with saving bank accounts was 53.10 lakh
SHGs forming 76.4 per cent as compared to the previous year’s
share of 79.5 per cent. The actual share of women SHGs would be
more as all RRBs from Uttar Pradesh, Gujarat and Jammu & Kashmir
and all Co-operative Banks from Uttar Pradesh, Gujarat, Jammu &
Kashmir, Goa, Assam, Nagaland, Tripura, Mizoram, and Manipur have
not reported data for women SHGs. In addition, some of RRBs viz.,
Marathwada Gramin Bank from Maharashtra, Assam Gramin Vikas Bank,
Bihar Kshetriya Gramin Bank, Madhya Bihar Gramin Bank, Nainital
Almora Kshetriya Gramin Bank and some of the Central Cooperative
Banks have also not reported women SHGs data.
Credit Market in India – Issues
The formal rural financial system in India
Trapped in a vicious circle of stagnant or even declining
credit–deposit ratio
Abnormally high cost of credit and default rate
The borrowers are confronting high interest rates, high
transaction costs and other impediments to access credit
Credit through Self help groups (SHGs) constitutes a small
portion of the total credit system.
Challenges for Agricultural Marketing and Rural Credit and
Prospects ahead:
Since the mid 1990s, there has been an increasing convergence on
the need for reforms in agricultural marketing because pervasive
regulations have unnecessarily increased marketing costs and
risks and uncertainty. The excessive marketing margins have
placed downward pressure on farm prices, increased the cost to
consumers, reduced competitiveness of exports and depressed
demand of local consumers. Independent of the amendments in state
APMR Acts, there are certain problems relating to the functioning
of APMCs, which require immediate attention. These pertain to
bureaucratization of market committees, non-ploughing back of
market fees for market development, and cartelization of traders
and market functionaries. One other problem relates to the over-
emphasis of market committees on collection of market fees rather
than promotion of marketing efficiency. These problems can be
tackled by the state governments even without amendment in the
APMR Acts.
The major business loans are given for seasonal agricultural
operations, for rural capital investments and for building rural
infrastructure. Its major development initiatives are taken up
through the Rural Innovation Fund and the Rural Infrastructure
Development Fund, the SHG-Bank Linkage Programme, the Watershed
Development Fund and the Tribal Development Fund besides the
Financial Inclusion and Financial Inclusion Technology Funds and
the Microfinance Development and Equity Funds.
The major challenges for rural India are as under:
Food Security especially in rural and tribal areas
Financial Inclusion by 2015
Poverty alleviation by ensuring Rural Livelihoods
Credit Flow for the Rural Services Sector
Strengthening of Cooperatives and Regional Rural Banks
Microfinance Institutions and addressing areas of concern
Conclusion: Agricultural credit has played a vital role in
supporting agricultural production in India. Though the outreach
and the amount of agricultural credit have increased over the
years, several weaknesses have affected the viability and
sustainability of these institutions. Furthermore, legal
framework and the outdated tenancy laws have hampered flow of
credit and development of strong and efficient agricultural
credit institutions. A review of performance of agricultural
credit in India reveals that though the overall flow of
institutional credit has increased over the years, there are
several gaps in the system like inadequate provision of credit to
small and marginal farmers, paucity of medium and long-term
lending and limited deposit mobilization and heavy dependence on
borrowed funds by major agricultural credit purveyors. These have
major implications for agricultural development as also the well
being of the farming community. We need initiatives in a
disaggregated manner in many different segments of agriculture
and agro industry: horticulture, aquaculture, pisciculture,
dairying, sericulture, poultry, vegetables, meat, food
processing, other agro-processing and the like.
The future growth of agriculture sector hinges critically on
further policy reforms. The critical reforms are summarized
below:
Direct Marketing: Permitting private sector players to establish
a private yard/market and undertake direct procurement for
producers.
Private sector participation in infrastructure provision:
Permitting private players to provide infrastructural facilities
such as warehouses, pre-cooling, cold storage, ripening chambers,
laboratories, Kisan Bhawans, electronic auctioning etc.
Designation of some markets as ‘Special Markets: Permitting the
establishment of a special Market/ Special commodity Market for
one or one group of commodities.
Quality standardization: Promoting quality standardization
through grading of notified agricultural commodities in
consonance with regulations.
Contract farming: Requiring contracts to be registered with then
sponsor Registering Authority to lower chances of the parties
reneging on the contract and Establishment of a Dispute
Settlement Authority.
Promotion of commodity exchanges: Permitting commodity exchanges
to establish electronic spot exchanges with a unified single
license; Permitting commodity exchanges to retain a part of the
market fee collected for strengthening accredited warehousing
capacity, standardization, grading and certification of
commodities for provision of a permanent price display board at
the market centre.
Independence of futures market regulator: Making the forward
Markets Commission (FMC) an independent regulator like SEBI for
the securities market.
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