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Contents

Introduction to Agribusiness

Chapter Title Page No

1. Overview of Indian Agriculture 3

2. Agriculture / Horticulture as a Sustainable Development 9

3. Agribusiness – Meaning, Definition, Structure and 18

Importance of Agribusiness

4. Emergence of Institutional Credit Mechanism for Agriculture 25

5. Micro Finance 38

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 CHAPTER 1
OVERVIEW OF INDIAN AGRICULTURE

Learning Objectives

After going through this chapter, you will be able to:

• Understand an Introduction to Agri Business
• Learn About the Role of Agriculture in Indian Economy
• View a SWOT Analysis of Indian Agriculture
• Learn about Diversification in Agriculture

Introduction

Since ages, Indian economy has been an agricultural economy. Majority of our population are dependent on
Agriculture for their basic needs. At the time of independence India was not self-reliant in cereal crops
production and depended on imports and this condition continued till 1966-67 leading to crisis in foreign
exchange reserves and balance of payments. The foreign debt increased manifold. The Green Revolution gave
fillip to Indian Agriculture from 1966-67 and consequently, Indian Production of food grains especially that
of wheat and rice increased sharply. This transformed the situation of our country from one of food deficiency
to self-sufficiency. It is a high time for a second Green Revolution which will lay emphasis on diversifying the
agricultural sector further in order to capture new market opportunities.

Agriculture sector is vital for the food and nutritional security of the nation. The sector remains the principal source
of livelihood for more than 58% of the population though its contribution to the national GDP has declined to
14.2% due to high growth experienced in industries and services sectors. Increasing agricultural production with
limited natural resources in a sustainable manner for ensuring food and nutritional security and providing income
security to farmers are the major challenges before the Government.

India ranks No. 1 in the world in production of Milk (Fresh, whole, Buffalo), Pulses, Ginger, Chick Peas, Bananas
Guavas, Papayas and Mangoes. Further, India ranks No. 2 in the world in production of Rice, Wheat, Potatoes,
Garlic, Cashew Nuts, Groundnuts, Dry Onion, Green Peas, Pumpkins, Gourds, and Cauliflowers. With the huge

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production base India can easily become the leading food supplier to the world and at the same time serving its
vast growing domestic market with over a billion people.

Role of Agriculture in Indian Economy

Agriculture is the largest sector of economic activity in India and has a crucial role to play in the countries’
economic development by providing food to people, raw material to Industries, employment to very large
population, capital for its own development and surplus for national economic development. The distribution
of national income shows that the share of various Agricultural commodities, Animal Husbandry and Ancillary
activities has always been more than 40%. During eighties and subsequently during 1990-91 this has fallen to
33% and has further gone down to 22% in recent times. This trend of decline share of agriculture in national
income is broadly in consonance with the conclusions derived by the development economies.

During last 70 years, the size of labor force dependent on agriculture had more than doubled and over the next
decade it is projected to go up by more than 25 percent. The occupational structure of the country has shown a
lack of flexibility. Large proportion of increasing labor force has been absorbed in agriculture due to absence of
any alternative employment opportunities and would only add further to the already low production and
disguised unemployment.

Indian Agriculture at Glance

India ranks No. 1 in the world in:
 Irrigated Area
 Cattle Population
 Buffalo population
 Milk production
 Pulses production
 Tea production
 Jute production

And ranks No. 2 in:

 Paddy production.
 Wheat production.

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 Groundnut production.
 Sugarcane production.
 Onion production.
 Fruits & vegetable production and Tobacco production.
 Silk production

India’s total production of food grains increased from 50 million tons during 1950s to more than 220 million
tons, a four-fold increase in food grains production after green revolution.

Agriculture Scenario in India

Population : 1 billion plus (72% rural)
1 Cropped area : 143 million Hectares (Net)
2 Crop intensity : 135%
3 Irrigated area : 40% of cropped area.
4 No. of villages : 0.63 Million.
5 Average size of Farm Holding : 1.55 Ha
6 Food grains production : > 200 Million tons
7 Average farm productivity : 1.6 tons/Ha (Food grains)
8 Fertilizer consumption : 16 million tons.
9 Fertilizer usage : 98 Kgs. per Ha.
10 67% of farmers depend on Rain fed farming.
11 42% of food grains come from rain fed farming

Even though production of food grains increased fourfold, it has resulted in lopsided development
concentrating more on food gain production.

SWOT Analysis of Indian Agriculture:

Strengths:
• Low social
• Strong agricultural technology / R&D base.
• Existence of diversified climatic conditions & Natural resources.
• Largest irrigated areas.

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Weaknesses:
• Low social
• Small land holding size and poor economies of scale.
• Lack of literacy leading to unawareness.
• Weak agricultural extension services.
• Poor market linkages.
• Insufficient infrastructure.
Opportunities:
• Optimize usage of existing infrastructure.
• Integration of extension efforts.
• Better market linkages – Domestic & exports.
• Investment in infrastructure.
Threats:
• WTO policies.
• Fragmentation of land holdings due to population growth.
• Poor investment and improper support to Agriculture.
• Environmental degradation, Water use efficiency, soil erosion & pollution.

Indian Agriculture
Agro-Climatic Zones
Planning Commission has demarcated the geographical area of India into 15 agro-climatic regions. The
15 agro-climatic zones are:
1. Western Himalayan Region: J&K, HP, UP, Uttaranchal
2. Eastern Himalayan Region: Assam Sikkim, W. Bengal & all Northeastern states
3. Lower Gangetic Plains Region: W. Bengal
4. Middle Gangetic Plains Region: UP, Bihar
5. Upper Gangetic Plains Region: UP
6. Trans-Gangetic Plains Region: Punjab, Haryana, Delhi & Rajasthan
7. Eastern Plateaus and Hills Region: Maharashtra, UP, Orissa & West Bengal
8. Central Plateau and Hills Region: MP, Rajasthan, UP

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 9. Western Plateaus and Hills Region: Maharashtra, MP & Rajasthan
10. Southern Plateaus and Hills Region: AP, Karnataka, Tamil Nadu
11. East Coast Plains and Hills Region: Orissa, AP, TN & Pond cherry
12. West Coast Plains and Ghats Region: TN, Kerala, Goa, Karnataka, Maharashtra
13. Gujarat Plains and Hills Region: Gujarat
14. Western Dry Region: Rajasthan
15. The Islands Region: Andaman & NICO bar, Lakshadweep

Ten Major Types of Farming in India

Wet Farming (Wet Rice)>2000 mm rainfall
 Dry Farming or Rain fed Farming
 Irrigated farming
 Subsistence Farming– To meet the local requirement.
 Commercial Farming
 Plantation agriculture– Single crop on large scale managed like industry
 Shifting cultivation – Clearing forest for crop cultivation
 Terrace cultivation—Slopes and hills of NE states.
 Intensive cultivation–- less land, maximum labor, Maximum yield
 Extensive farming—Large holding, less labor, low density population, mechanized

Characteristics of Indian Agriculture

 Low per capita availability of land (0.29 ha.)
 Dominance of Food Grains
 High dependence on Nature
 Low yield ( poor quality of seed, traditional methodology)
 Low level of mechanization in agriculture, smaller farms)
 Emphasis on subsistence farming
 A large variety of crops

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Diversification in Agriculture
In the agricultural context, diversification can be regarded as the re-allocation of some of a farm's
productive resources, such as land, capital, farm equipment and paid labor, into new activities; these can
be new crops or livestock products value-adding activities, provision of services etc.

The Indian agriculture is gradually diversifying in favor of high-value food commodities, and the
production in particular of fruits, vegetables, milk, meat, poultry, and fish has increased remarkably during
the last two decades. Such a shift is the result of rising income of consumers, changing consumption
patterns and growing urbanized consumption patterns are fast changing in favor of high-value food
commodities with rising per capita income, and changing tastes and preferences of consumers. This shift
in consumption patterns is not only observed in the urban areas and high-income strata but in rural areas
and poor-income group also. Factors leading to decisions to diversify are many, but include; reducing risk,
responding to changing consumer demands or changing government policy, responding to external shocks
and, more recently, as a consequence of climate change.

Areas of Diversification
Horticulture, Dairying, Sheep and goat rearing, Sericulture, Organic farming, Agric. Biotechnology,
Tissue culture, Apiculture ( Bee keeping), Pisciculture (Fish cultivation) , Mushroom cultivation, Green
house Farming, Vertical farming , Medicinal and Aromatic plants etc.

Conclusion
In this chapter, we have understood an introduction to Agri Business, learned about the role of agriculture
in the Indian Economy, viewed a SWOT analysis of Indian Agriculture, and learned about diversification
in agriculture.

*****

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 CHAPTER 2
AGRICULTURE / HORTICULTURE AS A SUSTAINABLE DEVELOPMENT

Learning Objectives

After going through this chapter, you will be able to:

• Understand an Introduction into Agriculture / Horticulture as a Sustainable Development
• Learn about the Drivers of Agri Business
• Review some Issues & Challenges
• Learn about the National Agricultural Policy

Introduction
In the recent years, there has been a significant shift in agriculture towards markets as observed by many
commentators. From producing at a subsistence level for own consumption, farmers are today producing
crops for market. This is commercialization.

There are also developments in the area of contract farming, high tech agriculture and the like. There are
different definitions and viewpoints on what constitutes agribusiness. While it is difficult to precisely
define what agri business is one can describe certain features that would identify whether agriculture is
being carried out as a business operation. Some of the features of the agriculture that would indicate
whether it is carried out as a business are:
i) To produce for a market.
ii) To produce quality material, to ensure market acceptance and for profit maximization.
iii) To run the farm as an enterprise- willing to pay for inputs and services in pursuit of profits.

Mere improvements in profitability or quality enhancement do not constitute a business activity. It is

done with a clearly identified market and results in optimization of farm revenues.

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Commercialization of Agriculture
Commercialization of agriculture has taken place at different times in response to different stimuli. Earlier,
growing cash crops like cotton, sugarcane jute, tobacco, etc. that was grown exclusively for the market
had been considered synonymous with commercialization. Over time, even food grains were produced for
the market due to cash needs of the farmers. This transition has been hastened by the Green Revolution,
which increased the marketable surplus. Commercialization on product side includes increase in
marketable / marketed output relative to production, changes in production mix, within crop sector in
favor of commercial crops, in terms of area and production, diversification towards different sub sectors
of agriculture i.e. livestock, poultry, fisheries and forestry.

Recent trends
While commercialization and diversification of agriculture have been discernible clearly over the last
decade, in the last five years an increased marketing orientation is in sharp focus. This is evident from
developments in the seeds sectors, dairy sectors, corporate processing of cereals (such as wheat flour) for
the urban market as also the processed food products, which impacts on agricultural production and the
organization of farming operation.

The entry of private sector, especially the large corporate in procurement of agri commodities, processing
and marketing thereof has been a heart – warming development for the farmers. The increasing exports of
agricultural commodities partly due to the better access under the WTOs has also changed the way farmers
operate as is evident from grapes, farms engaged in cultivation of specialty vegetables, flowers etc. But
considering the potential available in India for a variety of crops, there is a substantial scope for agri-
business activities.

Drivers of Agri business:

What will drive agri business in future and ensure continued marketing orientation of farmers is a question
to be examined in order to see whether the recent trends would be sustained. The increasing population
and also the increasing per capita income has seen the emergence of a strong middle class which demands
more and more of quality processed foods. The urban centric lifestyles have resulted in a shift to
convenience and fast foods, which could drive a vibrant food processing sector. The emphasis on quality

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has put pressure on sellers to grade and pack produce in a way that satisfies the customer’s expectations.
Quality enhancements improve price realization and profits.

The corporate sectors interest in agri-business which is due to the size of the market & the profit potential
will be critical factors in driving agriculture towards becoming a business. Some leading corporate houses
have a foothold in agriculture either through inputs and extension services or procurement, processing and
marketing. A few corporate houses straddle across input and output markets in the agriculture sector. The
entry of corporate is expected to lead to efficient management of agriculture and raise productivity/ quality
levels in farming.

The changes in the government policy that have been witnessed in the recent past will continue to drive
agri-business; Easing of restrictions, encouragement of private sector entry in agri business etc. would
provide the necessary conducive policy environment. Increasing investments in infrastructure and the
incentives providing for creation of post-harvest facilities have been helping farmers produce marketable
surpluses. An integration of post-harvest facilities would lead to risk free holding of produce for marketing
at an appropriate time.

Issues & Challenges

a. Technological / Production Issues:
The production and export base of all agro processed commodities has to be enlarged. Based on the past
trends of export, natural advantages, quality and productivity parameters, India has a comparative
advantage & is the world leader in producing certain good quality agro products. These products are
usually low volume and high value (and not essential food crops) and India’s production a capacity is
higher than the competitors. Finding suitable market is of the essence for enhancing the business prospects
in such crops.

A large part of the processing industry is in small scale and household sectors. Thus processing and
marketing are largely in the unorganized sector, lacks economies of sales and a mixed quality level. High
cost of raw materials and lack of varieties suitable for processing results in low value addition. Value
addition is only 7 percent in India as against 23 percent, 45 percent and 188 percent in China, Philippines

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and UK respectively. Technological obsolescence, inadequate quality testing labs and inadequate linkages
between industry and R&D institutions result in low marketability of processed products.

b. Post-harvest Management
Post-harvest Management practices are important for prevention of post-harvest losses, value addition,
maintenance and improvement of quality, enhancing the shelf life of food and ensuring remunerative price
for farmers. With production of about 600 MT of food, India is the 2nd largest producer after China in the
world. However, post-harvest management of food products in India has not kept pace with the progress
achieved in the production.

The wastage and value losses in India’s food production on account of lack of post-harvest management
are estimated at about Rs.50,000 crores. Cold chains are needed to help in retaining quality, freshness and
reduced post-harvest losses. This would also result in better capacity utilization & producing a wider range
of products and of international quality. The multinationals now entering the food industry have an
international marketing network and have their brand loyalties all over the world. This will enable the
Indian products to reach consumers the world over in the form and packing preferred by them.

Post-harvest & agro processing activities of livestock sector includes processing of milk, egg, meat of
different species and value added ready to eat products. Milk processing and manufacture of milk products
activities are both in co-operative and private sector. There is a regional imbalance in creation and
utilization of processing facilities for milk in the country. Moreover, only a few processing plans are
meeting the ISO standards. In order to maintain the quality of milk, bulk milk coolers have to be installed
by the milk unions / dairies.

As for the poultry sector, with QR being lifted domestic producers will be exposed to the threat of uneven
(and at times unfair) competition from developed countries. No subsidies exist for this sector in India;
although the governments of developed countries give their poultry industry heavy subsides on production
as well as exports. This is one of the many issues for trade negotiations under the WTO.

With a view to reducing post-harvest losses particularly in the case of fruits and vegetables, a number of
Government Organizations i.e. The Ministry of Food Processing Industry (MFPI), National Horticulture

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Board(NHB) , National Cooperative Development Corporation (NCDC) and Agricultural and Processed
food products Exports Development Authority (APEDA) have formulated schemes under which ,
financial assistance is given as grant in aid, subsidy and even in the form of soft loan for the purpose of
establishing value addition / processing units.

NABARD with Government of India had formulated a ‘Capital investment subsidy scheme ‘ during 1999-
2000, with a back ended capital subsidy which envisaged the creation of storage capacity of 12 lakh metric
tons under new / expansion of existing units , 8 lakh MT for rehabilitation of cold storage and onion
godowns by 2001-02. The sanctioned projects under the scheme had a total capacity of 23.4 lakh MT of
cold storage. GoI has announced the extension of the scope of the scheme from 2001-02 to cover food
grain storage as well. NABARD has, in anticipation of a good response for the scheme, more than doubled
its ‘budget for financing market yards, cold storages and rural go downs to Rs.317 crore the scheme,
obtained further extension and is valid till today.

NABARD is providing short term credit to the State Cooperative Banks, on behalf of the Central
Cooperative Banks to provide farmers with marketing credit against receipt of stocks in marketing
societies , storage go downs etc. enable them to hold on to their produce till remunerative prices are
forthcoming and distress sales are obviated. However still, inadequate availability of bank credit,
especially working capital loan, results in low capacity utilization and thus low return on investment was
observed. Further, efforts to promote processed food industry will necessarily have to focus among other
things, on a reasonable tax regime which will help better price realization for farmers, increased
industrialization and value addition and also ensure a fair price to the consumers. Disintermediation in the
marketing of agro-produce and elimination of some of the redundant parts of chain of market
intermediaries would benefit both consumers and producers.

The post-harvest management of fruits and vegetables is essential for countries growth. There are more
than 4000 small and large scale processing units in the country which process only about 2.5% of the total
fruit and vegetable as against 40-85% in developed countries. Fruit and vegetable is highly perishable but
most important commodity for human diet due to their high nutritional value. They are the cheapest and
other source of protective food supplied in fresh or processed or preserved form throughout the year for
human consumption. Hence the national picture will improve significantly. The wastage due to handling

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in case of fruits and vegetables is accounted around 30-36%. In India many fruits and vegetables are
underutilized. The potential of many fruits have not been utilized for processing and its functional
properties.

Proper handling, packaging, transportation and storage reduce the post-harvest losses of fruit and
vegetables. For every one percent reduction in loss will save 5 million tons of fruit and vegetable per year.
Processing and preservation technology helps to save excess fruit and vegetable during the glut season
(off season). The technology has become a necessity to improve the food safety and strengthen nation’s
food security. The technology helps to boost export of agricultural commodities in the form of preserved
and value added products. Presently mango, pineapple, citrus, grapes, tomatoes, peas, potato and
cucumber are being processed on a large scale. The upcoming infrastructures like Mega- Food Park can
change the situation of processing of fruits and vegetables processing. It will reduce the wastage and help
for on farm processing and packaging of these commodities.

c. Supply response and Non Price inputs:

In the context of attaining competitive edge, while price is an important factor in determining the supply
response, the other two important non-price factors are the sustained improvement of yield augmenting
technology and creating effective mechanism for diffusion and wide spread application of the technology
by the farmers. Research and technology transfer have therefore an important role in this regard. The
recent entry of corporate in providing productivity improvement services, based on appropriate species,
technologies, etc. (Mahindra Shubhlab, Rallis India) is a welcome development in this direction.

d. Controls and Restrictions:

Trade in agricultural commodities is still not free for the farmers producing cotton, paddy and even
sugarcane, since the entire country is not one market. In these commodities, there is a truncated market,
limited to a district or a state under various regulatory restrictions imposed mainly by State governments
after the Central Government removed most of the restrictions in late 1990s. Such controls and regulations
are imposed by the State Governments under the Essential Commodities Act, 1955.

The licensing of trade and fixation of upper limit of stocking for food grains, sugar, edible oils was useful
in the past when the country was faced with the situation of shortfall in such commodities, because such

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controls acted as deterrent to hiking the prices through hoarding. Similarly, in the face of overall shortage,
there was perhaps not much option other than procurement of wheat earlier through zonal movement
restrictions from surplus states and the imposition of levy for procuring rice and sugar.

Control orders such as restriction on movement of agri products and procurement through levy system, in
a situation of comfortable supply; harm the interest of both farmers and consumers. Movement restrictions
deprive the farmers from realizing remunerative prices. It also harms consumers, because consumers in
those states facing temporary scarcity (on account of natural calamities such as drought, flood and cyclone)
end up paying a much higher price than they would have paid in the event of free movement of
commodities.

Similarly, levies on commodities like rice and sugar ultimately serve as a tax on processors and are passed
on to the farmers / consumers through reduced payment to the farmers, resulting hike in prices of such
products in the free market.

Presently the major agricultural exports of India are that of raw or primary produce and unprocessed or
semi processed agriculture commodities, which are vulnerable to restrictions attributing to various reasons
such as bad weather conditions, deficient or delayed rainfall and food security issue. It was seen that
Exports of agricultural and processed foods have almost doubled to around 86018 crore rupees in 2012-
13 from 43727 crore rupees in 2011-12. To facilitate uninterrupted supply, the Union Government lifted
ban on export of processed foods and value added agricultural products. This will help Indian exporters
to move up the value chain as well as create additional employment in the country.

National Agricultural Policy

The Agricultural Policy of the Government aims at achieving 4% growth every year in Agriculture with a
focus on:
 Technology
 Policy
 Institutions

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Technology & Globalization:
• To increase production at least 4% per annum in all facets of agricultural sector.
• Investments to upgrade the information technology related to agriculture.
• Technology to link the farming community with local & Global markets.
• Use of precision farming technologies that can serve national resources and agricultural inputs through
appropriate policies.

Agricultural policies & Globalization

• To help enhancing Agricultural Trade.
• To increase export of Agriculture & food products.
• To facilitate the process of integrating Indian agriculture with Global economies.

Institutions & Globalization

• Institutions to apply rules and policies to protect law and order and to ensure property rights.
• Institutions to attract capital inflows into Agriculture.
• Improved domestic policies in financial sector by lending Institutions for agriculture.
• Services to small and medium farmers via community based savings instruments and credit for micro-
enterprises that add value to agricultural commodities before they are exported / marketed.
• Social safety nets and investments in education and skills that equip farmers to diversify their income
generating activities.

Emerging areas in Agriculture

 Export oriented production of Horticultural crops viz. Fruits, vegetables, Flowers etc. by
establishing of Agri. Export Zones in different parts of the country for area specific crops.
 Contract Farming for Quality Production and marketing with backward and forward integration
for production of crops.
 Organic farming by using Bio-fertilizers & Bio-pesticides.
 Establishment of Kisan Call Centers for transfer of information to farmers from universities and
research centers. Establishment of information “kiosks” by private persons.
 Establishment of Agri-clinics and Agri-business centers.
 Emphasis on processing, packing and transport of agricultural produce for exports.

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  Biotechnology and Tissue culture for better quality plant material.
 Establishment of cold storages.
 Establishment of Rural godowns for storage.
 Development of green houses for off season production of crops.
 Broilers production under contract farming.
 Dairy development.

Conclusion
In this chapter, we have understood an Introduction into Agriculture / Horticulture as a Sustainable
Development, learned about the Drivers of Agri Business, reviewed some issues & challenges, and learned
about the National Agricultural Policy.

*****

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 CHAPTER 3
AGRIBUSINESS
(MEANING, DEFINITION, STRUCTURE AND IMPORTANCE)
Learning Objectives
After going through this chapter, you will be able to:
• Understand what Agribusiness Management is including the meaning and definition.
• Identify distinctive features and the structure of Agribusiness Management.
• Learn about the scope for Agribusiness in India.
• Know the importance of Agriculture in the National Economy.

What is Agribusiness Management?

The term agribusiness was first introduced by Davis and Goldberg in 1957. It represents three part system
made up of-
1. The agricultural input sector
2. The production sector and
3. The processing-manufacturing sector.

The capture the full meaning of the term “agribusiness” it is important to visualize these sectors as
interrelated parts of a system in which the success of each part depends heavily on the proper functioning
of the other two.

Agribusiness is emerging as a specialized branch of knowledge in the field of management sciences. In

this context, agribusiness can be defined as science and practice of activities, with backward and forward
linkages, related to production, processing, marketing, trade, and distribution of raw and processed food,
feed and fiber, including supply of inputs and services for these activities.

The scope and opportunities in the agri-business have substantially expended due to globalization of trade
and agriculture. Share of Agriculture in the national income (14.4%). The agro industry is regarded as an
extended arm of agriculture. The development of the agro industry can help stabilize and make agriculture
more lucrative and create employment opportunities both at the production and marketing stages. Food
processing industry in India ranks first in the world in cereal and milk production and second in fruits &
vegetables and in five producers of groundnut, rice, wheat, tea, coffee, sugar, spices & oil seeds. Even

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with an industry size of US $ 70 billion, we process less than 2%. The industry has about 1.6 mn direct
employees and accounts for about 13% of the country’s exports and 6%of the industry investment.

The policies of globalization have taken Indian agriculture into the global village, opening up various
opportunities as well as numerous challenges. Agribusiness has opened up vast opportunities for value
addition, packaging, retailing, and exports of agricultural products with high application of technology
and management. Major part of Indian population is dependent on agriculture and this sector also supplies
raw material for various industries. The current structural changes in the economy have resulted in major
shifts in the Indian agricultural scenario. The scope and opportunity in the agri-business has been increased
due to policy reforms at local level under the directives of WTO regime. Agribusiness has opened up vast
opportunities in the industries like packaging, supply of raw material, processed agri food production,
export of agricultural products and other allied field with the use of high level technology.

Agribusiness system has undergone a rapid transformation as new industries have evolved and traditional
farming operations have grown larger and more specialized. The transformation did not happen overnight,
but came slowly as a response to a variety of forces. Knowing something about how agribusiness came
about makes it easier to understand how this system operates today and how it is likely to change in the
future.

Agribusiness Concept revolves around activities of commercialization of agriculture, which refers to

market orientation of agricultural production and marketing process. The agribusiness system is made
of thousands of businesses ranging from the small producers to large corporations It is the management
that drives and directs the firms , farms and food companies that come together in the whole agribusiness
system Each of these businesses have managers responsible for assuring successful completion of the
functions, tasks and activities.

Distinctive Features of Agri-business Management

The important distinctive features or the principle characteristics of agribusiness are as follows:
• Management varies from business to business depending on the kind and type of business. It varies
from basic producer to brokers, wholesalers, processors, packagers, manufacturers, storage
proprietors, transporters, retailers etc.

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 • Agri-business is very large and evolved to handle the products through various marketing channels
from producers to consumers.
• Management varies with several million of farmers who produce hundreds of food and livestock
products.
• There is very large variation in the size of agri-business; some are very large, while many other
are one person or one family organization.
• Most of the Agri-business units are conservative and subsistence in nature and family oriented and
deals with business that is run by family members.
• The production of Agri-business is seasonal and depends on farm production. They deal with
vagaries of nature.
• Agri-business is always market oriented.
• They are by far vertically integrated, but some are horizontally integrated and many are
conglomerated.
• There is direct impact of govt. programs on the production and performance of Agribusiness.

Agri-business involves three sectors:

1. Input sector: It deals with the supply of inputs required by the farmers for raising crops, livestock and
other allied enterprises. These include seeds, fertilizers, chemicals, machinery and fuel.
2. Farm sector: It aims at producing crops, livestock and other products.
3. Product sector: It deals with various aspects like storage, processing and marketing the finished
products so as to meet the dynamic needs of consumers. Therefore, Agribusiness is sum total of all
operations or activities involved in the business of production and marketing of farm supplies and farm
products for achieving the targeted objectives.

Scope for Agribusiness in India

1. India is endowed with varied ago-climate, which facilitates production of temperate, sub-tropical and
tropical agricultural commodities.
2. There is growing demand for agricultural inputs like feed and fodder, inorganic fertilizers, bio-
fertilizers.
3. Biotechnology applications in agriculture have vast scope in production of seed, bio-control agents,
industrial harnessing of microbes for bakery products.

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4. Export can be harnessed as a source of economic growth. As a signatory of World
5. Trade Organization, India has vast potential to improve it present position in the World trade of
agricultural commodities both raw and processed form. The products line include cereals, pulses,
oilseeds and oils, oil meal, spices and condiments, fruits and vegetables, flowers, medicinal plants and
essential oils, agricultural advisory services, agricultural tools and implements, meat, milk and milk
products, fish and fish products, ornamental fish, forest by products etc.
6. At present processing is done at primary level only and the rising standard of living expands
opportunities for secondary and tertiary processing of agricultural commodities.
7. The vast coastal line and internal water courses provides enormous opportunity for production of
marine and inland fish and ornamental fish culture gaining popularity with increase in aesthetic value
among the citizens of India..
8. The livestock wealth gives enormous scope for production of meat, milk and milk products, poultry
products etc.
9. The forest resources can be utilized for production of byproducts of forestry.
10. Beekeeping and apiary can be taken up on large scale in India.
11. Mushroom production for domestic consumption and export can be enhanced with improvement in
the state of art of their production.
12. Organic farming has highest potential in India as the pesticide and inorganic fertilizer application are
less in India compared to industrial nations of the world. The farmers can be encouraged and educated
to switch over for organic farming.
13. There is wide scope for production and promotion of bio-pesticides and bio-control agents for
protection of crops.
14. Seeds, hybrid and genetically modified crops, have the highest potential in India in the future, since
the productivity of high yielding varieties have reached a plateau.
15. Micro-irrigation systems and labor saving farm equipment have good potential for the years to come
due to declining groundwater level and labor scarcity for agricultural operations like weeding,
transplanting and harvesting.
16. Production of vegetables and flowers under greenhouse conditions can be taken up to harness the
export market.

21
17. Trained human resources in agriculture and allied sciences will take on agricultural extension system
due to dwindling resources of state finance and downsizing the present government agricultural
extension staff as consulting services.
18. The enhanced agricultural production throws open opportunities for employment in marketing,
transport, cold storage and warehousing facilities, credit, insurance and logistic support services.

Importance and role of Agro industries in the economic development of India

Agro-industry plays a fundamental role in employment creation and income generation. Particularly the
food and beverages processing sector remains important at all levels of economic development. Agro-
processing is now regarded as the ‘sunrise sector’ of the Indian economy due to its large potential for
growth and likely socio economic impact specifically on employment and income generation

Importance of Agriculture in the National Economy-

1. Share of Agriculture in the national income
Indian is an agricultural country, where 70 per cent population is dependent on agriculture. This forms
the main source of income. The contribution of agriculture in the national income in India is more,
hence, it is said that agriculture in India is a backbone of Indian Economy. The share of agriculture
and allied sector in GDP is estimated to be 14.2 %.
2. Agriculture as a source of livelihood (58%)
In India the main occupation of our working population is agriculture. About 70 per cent of our
population is directly engaged in agriculture. This high proportion in agriculture is due to the fact that
the non-agricultural activities have not been developed to absorb the rapidly growing population.
3. Largest employment generation sector
Agriculture in India dominates economic sector to such an extent that a very high proportion of
working population in India is engaged in agriculture. Agriculture provides greater employment
opportunities in the construction of irrigation projects, drainage system and other such activities.
4. Importance of agriculture in Industrial development
Agriculture is the source of supply of raw materials to our leading industries. Cotton and jute textile
industries, sugar, plantation are depend on agriculture directly. There are many industries which
depend on agriculture in an indirect manner. Many of our small scale and cottage industries like
handloom weaving, oil crushing, rice husking etc. depend on agriculture for their raw material.

22
5. Supply of Food and Fodder
Agriculture sector also provides fodder for livestock (35.33 crores). Cow and buffalo provide
protective food in the form of milk and they also provide draught power for farm operations. Moreover,
it also meets the food requirements of the people. Import of food grains has been very small in recent
years, rather export avenues are being looked for.
6. Role of agriculture in the field of international trade
It is the agricultural sector that feeds country's trade. Agricultural products like tea, sugar, rice,
tobacco, spices etc. constitute the main items of exports of India. If the development process of
agriculture is smooth, export increases and imports are reduced considerably. Thus, it helps to reduce
the adverse balance of payments and save our foreign exchange. This amount can be well utilized to
import other necessary inputs, raw-material, machinery and other infra-structure which is otherwise
useful for the promotion of economic development of the country.
7. Contribution for capital formation
Agriculture can play a big role in pushing the Capital Formation in India. Rural sector can transfer
labor & capital to the industrial sector which can be effectively used to increase the productivity in the
latter.
8. Support to transport and trade
Agriculture is the main support for railways and roadways which transport bulk of agricultural produce
from farm to the mandis and factories. Internal trade is mostly in agricultural products. Besides, the
finance of the govt. also, to the large extent, depends upon the prosperity of agricultural sector.
9. Marketable Surplus
The development of agricultural sector leads to marketable surplus. As country develops more and
more people are to be engaged in mining, manufacturing and other non- agricultural sector. All these
people depend upon the food production which they can meet from the marketable surplus. As
agricultural development takes place, output increases and marketable surplus expands. This can be
sold to other countries.
10. Overall Economic Development
In the course of economic development, agriculture employs majority of people. This means raising
the level of the national income and standard of living of the common man. The rapid rate of growth
in agriculture sector gives progressive outlook and further motivation for development. As a result, it

23
 helps to create proper atmosphere for general economic development of the economy. Thus, economic
development depends on the rate at which agriculture grows.
11. Source of Saving
Improvement in agriculture can go a long way in increasing savings. It is seen that rich farmers have
started saving especially after green revolution in the country. This surplus amount can be invested in
agriculture sector for further; development of the sector. Saving potentials are large in agriculture
sector which can be properly tapped for the development of the country.
12. Source of Government Income
In India, many state governments get sizeable revenue from the agriculture sector. Land revenue,
agricultural income tax, irrigation tax and some other types of taxes are being levied on agriculture by
the state governments.

Moreover, considerably revenue is earned by way of excise duty and export duty on agricultural products.
Raj committee on Agricultural Taxation has suggested imposition of taxation on agricultural income for
raising revenue.

Conclusion
In this chapter, we have learned about Introduction of agribusiness, agribusiness management, and
distinctive features of agribusiness management and nature of successful agribusiness. We also learned
importance and role of agro industries in economic development of India.

*****

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 CHAPTER 4

EMERGENCE OF INSTITUTIONAL CREDIT DELIVERY MECHANISM

SINCE 1900 FOR AGRICULTURE

Emergence of co-operatives
The measures initiated to reduce indebtedness and regulate the money lending activities failed to provide a
long term solution and resulted in stagnation in rural indebtedness and finance flow. In this backdrop, the
state took upon itself the onerous task of providing financial assistance to rural sector, particularly to
agriculture, on one hand and restructuring of rural credit operations on the other. After a detailed study of
the then prevailing European system, the Raiffeisen type of co-operatives that existed in Germany was
considered as a lasting solution to the problem in the Indian context. Basically the approach was focused on
purveying of agricultural credit. In order to provide necessary legislative support to this endeavor, the Co-
operatives were formed as the premier institutions for providing credit in the rural areas, mainly for
agricultural purposes.

Short-term co-operative credit structure

The co-operative credit structure gradually evolved into two separate arms, one for providing production
credit (short term) structure and another for providing investment credit (long term) structure. The ST co-
operative credit structure comprises Primary Societies at the base (Village) level. The Primary level societies
are organized into District Central Co-operative Banks (DCCBs) at the district level as a federation and the
DCCBs in turn are federated into State Co-operative Banks (SCBs) at the provincial (state) level.

Over a period of time, several types of primary level societies emerged, such as Farmers Service Societies
(FSS); Large sized Agriculture and Multipurpose Societies (LAMP) and functional societies such as Milk
Producers Co-operatives (MPC) etc. Basically these societies were organized for specific purposes of linking
credit, production, processing and marketing etc. so that the benefit of economy of value addition or volume
of business accrued to the members. In the process, the infrastructure for procurement / storage, processing,
marketing and other services were established in co-operative sector.

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The Long Term co-operative Credit structure
The long term Cooperative Institutions came into existence as Central Land Mortgage Banks in nineteen
twenties, primarily as purveyors of credit for redemption of debt. Over a period of time, subsequent to State
legislation initiatives, they evolved into Primary Co-operative Agricultural and Rural Development Banks
(ACARDB) and federated at State level as State Cooperative Agricultural and Rural Development Banks
(SCARDB). Like in short term cooperative structure, the PCARDBs are promoted by the state in
partnership with members and the SCARDBs are the federation of PCARDBs. As these were not formed
for mobilizing deposits and relied on borrowed funds for on lending, they are not subjected to banking
regulations. Though, this structure has recently been allowed to mobilize public deposits to a limited extent,
the base is still negligible.

Induction of Commercial Banks (CBs) into Rural Credit

As the gap between demand and supply of rural credit was very large there was need to solicit support of
the Commercial Banking sector for supplementing the Government effort for providing credit access to rural
people and with a view to ensure that the credit and development efforts are directed to the desired sectors
of the economy, Government of India brought the social control over commercial banks in 1967. However,
the voluntary control could not motivate commercial banks to the desired extent. The entry of commercial
banks into rural lending was facilitated by nationalization of 20 major commercial banks in two phases. The
move was further followed up by Reserve Bank of India (the Central Banking authority) with the
introduction of obligatory credit allocation by all commercial banks to priority sector (40%) which includes
most of the lending to rural and small enterprises.

The decentralized credit planning through Lead Bank Scheme was also introduced. Under these measures,
banks were allowed to open large number of rural branches and recruit agricultural specialists to handle the
volume of rural lending. All the 466 districts in the country are placed under one or other of the commercial
banks called the District Lead Bank who spearheads the credit allocation for rural and priority sector lending
by all formal credit agencies at the district level. Similarly, lead banks also were appointed at the State level
to plan and monitor the credit flow to various sectors in the State.

Regional Rural Banks

Despite all these efforts, the credit access for the poorer sections of the society was limited when compared
to richer clientele and the commercial banks were not tuned to the needs and requirements of the poor and

26
small agriculturists. The Co-operatives on the other hand had low resources to meet the expected demand.
The solution was sought by establishing a separate banking structure, which would have the advantages of
both the Co-operatives (local presence) and Commercial banks (business acumen and resource base). With
this background, the Regional Rural Banks were started as a low cost commercial banks operating in rural areas
and provide credit to rural poor. The RRBs are jointly owned by the Central Government, State Government
and a Commercial Bank / State Cooperative Bank in the ratio of 50:15:35.

National Bank for Agriculture and Rural Development (NABARD)

A committee appointed by Government of India had reviewed the entire arrangement for institutional credit
for Agriculture and Rural Development and suggested that there is a need to provide undivided attention for
development of rural credit system. Based on the recommendations, NABARD was set up in the year 1982 by
integrating the rural credit functions of other agencies and Agricultural Credit Department of RBI to provide
credit for the promotion of agriculture, cottage and village industries, handicrafts, other rural crafts and allied
economic activities in rural areas in order to secure integrated rural development. Since its inception, NABARD
is discharging its mandate through activities relating to credit planning, financial assistance, institutional
development and promotional efforts.

Government of India and RBI jointly owned the equity of NABARD. NABARD raises its resources through
re-deployment of surpluses, borrowings from multilateral and bilateral institutions, borrowing from the market,
institutional deposits and contributions received from Reserve Bank of India. National Bank for Agriculture
and Rural Development (NABARD) is an Apex Development Bank of the country for supporting and
promoting agriculture and rural development.

NABARD Refinance to Commercial Banks

NABARD refinances term loans extended by the commercial banks for all types of bankable schemes for
development of agricultural activities, where the repayment period exceeds 36 months. Refinance
provided by NABARD to the commercial banks in respect of their eligible term loan lending varies from
50% - 100%, based on priority given to the activity/area/target group.

Major purposes covered are: Farm mechanization, Minor irrigation, Plantation/ Horticulture, wasteland
development, storage and market years, Inland/marine fisheries, animal husbandry schemes, etc. Poverty
alleviation programmes like SGSY are also refinanced.

27
 Drawal of refinance is allowed under Automatic Refinance Facility for traditional activities, up to a
refinance commitment of Rs.15 lakhs. For larger investment outlays approval of NABARD is necessary.
For this purpose individual schemes are to be formulated and submitted to NABARD Regional Office.

In such cases, if the schemes are sanctioned by NABARD, Banks are permitted to draw refinance in
respect of even the disbursements made one year before the sanction by NABARD.

Types of Refinance Extended by NABARD

The refinance provided by NABARD falls into three categories:
1. Automatic refinance
2. Refinance provided under the Banking Plan.
3. Refinance under individual schemes.

Automatic refinance
In this type, NABARD, subject to their eligibility, will extend automatic refinance to the bank branches
against disbursements made by them in respect of the term loans. Disbursements made by the branches
under Govt. Sponsored Schemes, National Project on Bio-gas Development (NPBD) Massive National
Programme of assistance to Small and Marginal Farmers for minor irrigation and other purposes. Special
schemes for development of Scheduled castes and Scheduled tribes come under this type of refinance.

Refinance under Banking Plans

In respect of some specified activities, NABARD, in consultation / co-ordination with the Government
Departments concerned and / or institutions, formulate banking plans for implementation in specific
areas. The outlays under the banking plans are then divided among the participating branches. Subject to
these ceilings, disbursements made by the participating bank branches are eligible for refinance,
automatically. Some of the common banking plans are:
• Farm mechanization scheme (Tractors / Power tillers).
• On farm development (OFD) being implemented by Command Area Development Authorities
(CADA).
• Normal forest plantation schemes being implemented by the Forest Development Corporations.

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Refinance under individual schemes
In cases which are not covered by the above two types of refinance, the banks will have to submit to
NABARD specific schemes formulated for a single branch or a group of branches, furnishing therein the
details of the scheme like:

Introduction / Objective of the scheme, Location, agro-climatic conditions, particulars of the scheme,
technical and financial viability of the scheme, forward backward linkages, unit cost., physical and
financial outlay, disbursement schedule, margin, bank finance, security stipulations , repayment
schedule of the loan, recovery performance of the branch/ branches where the scheme is to be
implemented.

These schemes are submitted through the controlling authority of the branch/ branches to the Regional
Office concerned of NABARD for the sanction of refinance. NABARD would consider the scheme and
if found feasible and viable, would communicate their sanction. The controlling office has to
communicate to the Regional Office of NABARD, Banks consent and acceptance of terms and
conditions of sanction.

After the sanction by NABARD branch / branches would disburse the loan to the prospective borrowers
after completion of the necessary formalities like documentation and security. Loans thus disbursed will
be eligible for refinance from NABARD at an interest rate lower than the ultimate lending rate, for which
the branch through its controlling office will have to submit the prescribed drawal application.

NABARD have stipulated that any scheme to be considered for them for sanction of refinance should have
a minimum outlay of Rupees one lakh. In case this outlay is not feasible for a single branch, the scheme
may be extended to more than one branch.

Further, NABARD permits drawal of refinance in respect of disbursements made one year prior to the
date of sanction of the scheme submitted by Bank. Hence branches should keep in view the
'disbursements made during the 12 months period preceding the date of submission of schemes and the
projection for disbursements in the next one or two years, based on the Branch Credit Plan under Service
Area Approach (SAA) and Potential Linked Plans (PLP) prepared by NABARD.

Percentage of NABARD's refinance available in different regions for different activities:

29
S.No Region/ Purpose/ Sector % to Bank loan
I North Eastern Region and Sikkim
(Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram,
Nagaland & Tripura as well as Sikkim)
a. SC/ ST Action Plan/Wasteland development, Dryland development,
ARWIND, MAHIMA, SHG, Margin Money Scheme 100%
b. Non-Farm Sector 100%
c. All other purposes 90%
II Other Regions
1. SC/ST Action Plan, ARWIND, MAHIMA,100% SHG, Margin Money Scheme
(a) Wasteland development schemes where individual are beneficiaries 100%
(i) Nursery Schemes
(ii) Farm Forestry
(iii)Tree Patta Scheme
(b) Dry land development
(c) Farm Forestry programmes sanctioned to corporate bodies including Forest
Development Corporations
2. Minor irrigation (Schematic as well as ARF [FS], 90%
excluding MI units financed under IRDP / SGSY
3. Government Sponsored Programmes (including ISB component) 70%
4. Diversified purposes (Schematic as well as ARF) 70%
5. Farm Mechanization * 70%
6. Work animals, animal driven carts & bio-gas 70%
7. Non- Farm activities ** (including pre sanction schemes) 90%

* In respect of advances made for acquisition of second tractor by a beneficiary, the quantum of
refinance will be 40% of loan amount
** DRIP/ APRI areas will continue to carry 100% refinance for non-farm sector.

30
General:
In the case of externally aided project, the percentage of refinance as specified in the relative agreements
and as indicated in the sanction letter will apply.

Criteria for refinance:

• Technical feasibility of the project and adequate response from prospective beneficiaries.
• Financial viability and adequate incremental income to ultimate borrower to repay the loan within
reasonable period, and
• Organizational arrangements to ensure close supervision.

NABARD – Highlights of 2011-12

NABARD recorded high levels of performance in purveying rural credit during 2011-12. The aggregate assets
held by NABARD rose to Rs.1, 82,300 crore as on 31 March 2012, an increase of Rs.23,500 crore compared
to the position as on 31 March 2011.

Refinance to Banks
Refinance assistance provided by NABARD to cooperative banks and regional rural banks (RRBs) during
2011-12 to disburse crop loans to farmers touched an all-time high of Rs.48,000 crore, registering an increase
of Rs.14,000 crore or 41% growth over the previous year. The investment refinance provided to banks by
NABARD during 2011-12 for capital formation in agriculture and allied sectors and for non-farm activities
stood at Rs.15,424 crore, registering an increase of Rs.1,938 crore or 14 % growth over last year.

RIDF to State Governments

Another all-time high was achieved by NABARD under Rural Infrastructure Development Fund (RIDF) by
disbursing Rs.14, 970 crore during 2011-12, which was Rs.2,900 crore or 24% more than the disbursements
made to state governments during 2010-11. Sanctions given by NABARD under the RIDF also increased to
Rs.21,460 crore, which was over Rs.3, 000 crore more than the sanctions during the previous year (growth of
17%). These loans are used by State governments to create infrastructure in agriculture and allied sectors
including irrigation and power, rural connectivity through rural roads and bridges, health, education, rural
drinking water supply, etc.

31
Special Scheme for Warehouse Projects
For the first time, a special allocation of Rs.2, 000 crore was made to NABARD for warehouse financing under
RIDF by the Finance Minister in the Union Budget for 2011-12. NABARD achieved 100 per cent utilization
of the fund during the year, by sanctioning warehousing projects to the state governments and private sector
agencies through banks. State Governments availed of Rs.1,240 crore and banks availed of refinance to the
extent of Rs.760 crore. This is expected to create around 9 million metric tons of warehousing infrastructure,
particularly for storage of food grains in the country.

NABARD Infrastructure Development Assistance (NIDA)

NIDA is designed to assist State Governments and other State owned organizations/Corporations, both on-
budgets as well as off-budget funding on flexible terms, outside RIDF, for creation of rural infrastructure.
Under this facility during 2011-12, term loans of Rs.932.97 crore have been sanctioned and Rs.422.90 crore
has been disbursed to various State owned entities.

Direct Lending to Cooperative Banks

The implementation of Revival Package as per Vaidyanathan Committee recommendations has enabled CCBs
to raise financial resources from sources other than the SCB. NABARD has designed a Short Term
Multipurpose Credit Product for financing directly to CCBs. Under this line of credit Rs.1, 547 crore of loan
has been sanctioned to 24 CCBs and 2 SCBs and Rs.937.74 crore has been disbursed during 2011-12.

Direct Lending to Producers’ Organizations (POs)

During 2011-12, an initiative to support Producers’ Organizations through credit and credit-plus activities and
also strengthen PACS to provide multi service activities to farmers has been launched by NABARD. During
the year Rs.35.49 crore of assistance has been sanctioned and Rs.7.43 crore has been disbursed to enable
various types of Producers’ Organizations to improve production systems, improve the value chain and
strengthen the marketing capabilities. Around 1846 PACS have been promoted/supported as Multi Service
Providers directly befitting the farmers/members of PACS.

Special Thrust for Eastern India and North East Region

NABARD introduced an innovative concessional refinance scheme for banks, to increase productivity in
Eastern India. Under this scheme, refinance to the tune of Rs.129 crore was disbursed during the year.
Refinance flow to the North Eastern Region amounted to Rs.233 crore during 2011-12. NABARD’s refinance

32
was utilized by banks to support investments in minor and micro Irrigation, Animal Husbandry, Fisheries,
Land development, Plantation & Horticulture, SHGs/ JLGs, Agro Clinic/Agro Business, Agro–Processing,
Agri Marketing Infrastructure including cold storage, godowns, market yards, Non-Conventional Energy
Sources, Rural Non-Farm Sector etc.

Subsidy Schemes and Revival Packages implemented by NABARD

A ‘Revival, Reform and Restructuring Package' of Rs.3,884 crore for the Handloom Sector to benefit 15,000
Weaver Societies and 3 lakh Weavers across the country was finalized by the GoI, Ministry of Textiles during
2011-12. The GoI has authorized NABARD to implement the same. In addition, the Central Government also
nominated NABARD as the channelizing agency for release of margin money and interest subsidy assistance
under the Comprehensive.

Package for the Handloom Sector to all banks during 2011-12

In addition to the above, NABARD has already been implementing 16 subsidy schemes on behalf of the
Government of India. During the year 2011-12, an amount of Rs.486.55 crore has been released as subsidy to
various banks on behalf of the beneficiaries. The subsidy schemes cover sectors like animal husbandry and
poultry development including Poultry Venture Capital Fund & Mother Units for Rural Backyard Poultry.,
Cold Storages, Rural Godowns, and Solar lighting & Photo voltaic cells schemes.

Development Interventions
SHG-Bank Linkage Programme
During the year (2011-12), 7.3 lakh SHGs have been promoted by NABARD and linked with banking system
in terms of savings accounts as against about 6 lakh SHGs promoted during last year, taking total number of
SHGs promoted and saving linked with banks to 82 lakh.

Joint Liability Groups (JLG): In order to augment the flow of credit to small and marginal farmers and other
micro entrepreneurs, about 1.50 lakh JLGs were promoted taking cumulative position to over 2.90 lakh JLGs.

Farmers’ Clubs: During the year, 25,238 Farmers’ Clubs were launched by different agencies with NABARD
support, taking the total number of such clubs to around 1, 01946

33
Financial Inclusion
During the year 2011-12, the disbursements under Financial Inclusion Fund (FIF) and Financial Inclusion
Technology Fund (FITF) were Rs.18.49 crore and Rs.128.05 crore reflecting a growth (over previous year) of
100.8% and 137.1% respectively. With this, the cumulative disbursement since inception touched a level of
Rs.36.05 crore under FIF and Rs.183.82 crore under FITF. Support was extended for setting up of Financial
Literacy and Credit Counseling Centers (FLCCs) to Lead Banks (111 FLCCs), capacity building programmes
by commercial banks and RRBs and Financial Literacy awareness camps by RRBs, under FIF. Under FITF,
support was extended for implementation of Core Banking Solution (CBS) by weak RRBs (26 out of 28) and
Information & Communication Technology (ICT) solution by RRBs (52 out of 82).

Pilot Projects launched during 2011-12

Many pilot projects of innovative interventions were launched by NABARD during 2011-12. Some of them
were converting KCC to cashless transactions through mobile phone, financing for livelihood and agriculture
productivity enhancement measures in watershed areas, increasing water use efficiency in watersheds through
water budgeting, micro-Irrigation, etc., 170 Model Units of SRI with outlay of Rs.24.19 crore implemented in
14 states, Promotion of Natueco Farming – 20 projects with an assistance of Rs.111 lakh sanctioned,
Sustainable Sugarcane Initiatives (SSI) and Promotion of seed villages through seed business ventures

Watershed Development: NABARD's total commitment under watershed development programme rose to
Rs.1, 600 crore, covering an area of about 1.78 million ha. Disbursement of Rs.272 crore under watershed
development programmes anchored by NABARD was made during 2011-12, registering a positive growth of
19% over the previous year. Disbursement under the Prime Minister’s programme in distressed districts during
2011-12 was Rs.181 crore as against Rs.137 crore in the previous year, the growth being a robust 32%. Under
Indo-German Watershed Development Programme (IGWDP) supported by KfW, an amount of Rs.51 crore
was disbursed. Under the Planning Commission funded Integrated Watershed Development Programme in
Bihar, the disbursement during 2011-12 touched Rs.16.8 crore from a level of Rs.3.61 crore in 2008-09,
registering almost five times increase in three years’ time.

Tribal Development: During 2011-12, assistance of Rs.290.63 crore was sanctioned for 98 projects benefiting
72,659 tribal families. The cumulative sanction stood at 415 projects in 26 states/UTs benefiting 3, 23,062
tribal families, who were assisted from the Tribal Development Fund (TDF) of NABARD to the tune of
Rs.1,208 crore.

34
Promotional Activities: During 2011-12, NABARD released Rs.232.57 lakh of grant support for conducting
520 marketing events like Exhibitions and Melas for rural artisans, taking the cumulative figure to 1,818 and
disbursements to Rs.875.96 lakh. Further, during the year, 9,852 rural entrepreneur development programmes
were supported, benefiting rural youth and involving release of grant assistance of Rs.1,309 lakh, bringing the
cumulative grant assistance to Rs.96.45 crore, for conducting 27,711 such training programmes covering
6,92,775 rural youth. Also, 56 Rural Marts were established with financial assistance released from NABARD
to the tune of Rs.82.48 lakh, thus taking the cumulative number of rural marts to 513 and total assistance
disbursed to Rs.320 lakh. Apart from this, 50 Rural Haats were sanctioned grant assistance of Rs.248.50 lakh
during the year thus bringing the cumulative number to 331 Haats with the grant assistance of Rs.1,482 lakh.

During the year 2011-12, six participatory clusters were approved with a grant assistance of Rs.90 lakh. Sector
wise, nearly 50% of the clusters are in the Handloom sector while Handicrafts have 41 clusters and the new
areas brought under the cluster are rural tourism, food processing and marketing.

Rural Innovations
NABARD supports rural innovations from out of its Rural Innovation Fund (RIF) since 2005 to promote
innovations across the country, having the rural poor in focus. During the year, 2011-12, 80 innovative projects
were sanctioned, taking the cumulative number of innovative projects sanctioned to 455. An amount of
Rs.10.18 crore has been disbursed during the year 2011-12 taking cumulative disbursements to Rs.43.03 crore
this year.

Institutional Development – Regional Rural Banks (RRBs)

NABARD has facilitated 100% Core Banking Solution in 80 RRBs to integrate them with NEFT and RTGS
and improve better customer service and operational efficiency. Further, recapitalization assistance to the tune
of Rs.1, 012 crore has been released to 16 RRBs falling short of CRAR at 9%. NABARD is also coordinating
with Institute of Banking Personnel Selection (IBPS) for recruitment of staff and officers in RRBs and has
been entrusted with the responsibility for Coordination and Supervision of the selection process besides
finalization of methodology.
Institutional Development – Short term and Long term Cooperatives
NABARD has advised the SCARDBs that with reference to the year 2012-13, their audit would be carried out
by the Chartered Account Firms and refinance to the SCARDBs will be released accordingly. Under the GoI’s

35
Revival Package for Short Term Cooperative Credit Structure (STCCS), an amount of Rs.9,003 crore has been
released by NABARD as GoI share for recapitalization of 54,715 PACS in seventeen States and 13 CCBs.

Common software for accounting has been finalized by NABARD and sent to 20 States for implementation.
Training has been imparted to nearly 3.5 lakh personnel from the STCCS in business development and
profitability, change management, CAS/MIS and other relevant areas. Studies have shown that these measures
have led to increase in volume of business and credit flow of CCS entities besides cleansing their balance
sheets, improved governance and increase in coverage of SF/MF and borrowing membership. The outreach to
Small and Marginal farmers has increased from 10% in 2004 (Pre-reform) to 25% in 2008. Assistance under
the Cooperative Development Fund has been provided by way of disbursement of Rs.20.77 crore for the year
2011-12. This assistance has been given separately for training and capacity building of officials of
Cooperatives for various skill building initiatives. The cumulative disbursement under CDF was Rs.108.38
crore as on 31 March 2012.

Core Banking Solutions (CBS) for Cooperatives

The State level and district level cooperative banks would require very high initial investment both in terms of
technology, infrastructure as well as manpower training. They would need to bring in technology partners with
the potential capacity to realize a project at this scale. Recognizing the difficulty of individual cooperative
banks to engage with large technology providers, NABARD has started a programme to help the cooperative
banking system migrate to the CBS platform. In the first phase of this initiative, NABARD has brought
together 140 co-operative banks under the programme. The major objectives of the programme are:
 Enable banks to offer a wider, more flexible product portfolio
 Improve profitability
 Compliance with all regulatory requirements in operations and reporting
 All Government funds to be remitted through e-payment mode
 Facilitate financial inclusion

NABCONS
NABARD Consultancy Services (NABCONS) is a subsidiary of NABARD, established to provide
consultancy services to a wide range of clients. The Company registered an impressive and diversified
performance in consultancy business during the financial year 2011-12 and earned revenue income of Rs.20.27
crore. It helped promote private investment and financing in commercial agricultural projects by preparation

36
of detailed project reports, techno-economic feasibility reports and appraisal studies. Under the India Africa
Summit Forum, NABCONS has been entrusted by GOI with the responsibility of establishing the Indo-African
Institute of Agriculture and Rural Development in Africa. RBI has relaxed the guidelines of service area
approach with a view to facilitate rural borrowers to have easy access to institutional credit from any bank of
their choice at a competitive price and to provide banks, public and private with a level playing field.

All the initiatives discussed above need massive financial support both from Government and Banks. The
financial Institutions should look at Agriculture as a viable commercial activity rather than a traditional one
and thus play a major role in changing the face of rural economy. It is all the more essential in the present day
that all the Institutions connected with Agriculture and rural development should work with the spirit of
partnership to give boost to the Rural economy as per the policy initiatives of the Government.

*****

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 CHAPTER 5
MICRO FINANCE

Microfinance sector has covered a long journey from micro savings to micro credit and then to micro
enterprises and now entered the field of micro insurance, micro remittance, micro pension and micro
livelihood. This growth process has given a great boost to the rural poor in India to reach reasonable
economic, social and cultural empowerment, leading to better life of participating households.

1. What is microfinance?
“Microfinance” is often defined as financial services for poor and low-income clients. In practice, the term
is often used more narrowly to refer to loans and other services from providers that identify themselves as
“microfinance institutions” (MFIs). These institutions commonly tend to use new methods developed over
the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These
methods include group lending and liability, pre-loan savings requirements, gradually increasing loan
sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and
promptly.
More broadly, microfinance refers to a movement that envisions a world in which low-income households
have permanent access to a range of high quality financial services to finance their income-producing
activities, build assets, stabilize consumption, and protect against risks. These services are not limited to
credit, but include savings, insurance, and money transfers.

2. What is the difference between microfinance and micro credit?

Micro credit refers to very small loans for unsalaried borrowers with little or no collateral, provided by
legally registered institutions. Currently, consumer credit provided to salaried workers based on automated
credit scoring is usually not included in the definition of micro credit, although this may change.
Microfinance typically refers to micro credit, savings, insurance, money transfers, and other financial
products targeted at poor and low-income people.

3. How is micro credit different from other targeted development lending?

In addition to the new techniques explained in Q1, the micro credit approach has tried to avoid the pitfalls
of an earlier generation of targeted development lending. The approach focuses on fostering better
repayment discipline and charging interest rates that cover the costs of credit delivery, both of which
support development of sustainable institutions that can continue to expand their services in the future.

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4. Who are microfinance clients?
Typical microfinance clients are poor and low-income people that do not have access to other formal
financial institutions. Microfinance clients are usually self-employed, household-based entrepreneurs.
Their diverse “micro enterprises” include small retail shops, street vending, artisan manufacture, and
service provision. In rural areas, micro entrepreneurs often have small income-generating activities such
as food processing and trade; some but far from all are farmers.

Hard data on the poverty status of clients is limited, but tends to suggest that most microfinance clients
fall near the poverty line, both above and below. Households in the poorest 10% of the population,
including the destitute, are not traditional micro credit clients because they lack stable cash flows to repay
loans. Most clients below the poverty line are in the upper half of the poor. It is clear, however, that some
MFIs can serve clients at the higher end of the bottom half. Women often comprise the majority of clients.

5. How do borrowers use micro credit loans?

Most micro credit borrowers have micro enterprises—unsalaried, informal income-generating activities.
However, micro loans may not predominantly be used to start or finance micro enterprises. Scattered
research suggests that only half or less of loan proceeds are used for business purposes. The remainder
supports a wide range of household cash management needs, including stabilizing consumption and
spreading out large, lumpy cash needs like education fees, medical expenses, or lifecycle events such as
weddings and funerals.

6. What kinds of institutions deliver microfinance?

Most MFIs started as not-for-profit organizations like NGOs (non-governmental organizations), credit
unions and other financial cooperatives, and state-owned development and postal savings banks. An
increasing number of MFIs are now organized as for-profit entities, often because it is a requirement to
obtaining a license from banking authorities to offer savings services. For-profit MFIs may be organized
as non-bank financial institutions (NBFIs), commercial banks that specialize in microfinance, or
microfinance departments of full-service banks.

7. Do MFIs do other things besides financial services for low-income people?

Some MFIs provide non-financial products, such as business development or health services.

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Commercial and government-owned banks that offer microfinance services are frequently referred to as
MFIs, even though only a portion of their assets may be committed to financial services to the poor.

8. How does microfinance help the poor?

The impact of micro credit has been studied more than the impact of other forms of microfinance. Micro
credit can provide a range of benefits that poor households highly value including long-term increases in
income and consumption. A harsh aspect of poverty is that income is often irregular and undependable.
Access to credit helps the poor to smooth cash flows and avoid periods where access to food, clothing,
shelter, or education is lost. Credit can make it easier to manage shocks like sickness of a wage earner,
theft, or natural disasters. The poor use credit to build assets such as buying land, which gives them future
security. Women participants in micro credit programs often experience important self-empowerment.
There is a strong indication from borrowers that micro credit improves their lives. They faithfully repay
their loans even when the only compelling reason is to ensure continued access to the service in the future.

Other microfinance services like savings, insurance, and money transfers have developed more recently.
Client demand indicates that poor people value such services. MFIs that offer good voluntary savings
services typically attract far more savers than borrowers.

9. When is microfinance NOT an appropriate tool?

Financial services, particularly credit, are not appropriate for all people at all times. For loans that will be
used for business purposes, micro credit best serves those who have identified an economic opportunity
and can capitalize on it if they have access to a small amount of ready cash. Regardless of how loans are
used, MFIs can provide long-term, stable credit access only when clients have both the willingness and
ability to meet scheduled loan repayments.

Microfinance is particularly inappropriate for the destitute, which may need grants or other public
resources to improve their economic situation. Grants are a more efficient way to transfer resources to the
destitute than are loans that many will not be unable to repay. Too much risk is placed on the MFI and
client, when the only way a client can repay a loan is by starting a successful business. Basic requirements
like food, shelter, and employment are often more urgently needed than financial services and should be
appropriately funded by government and donor subsidies.

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Governments and development agencies often use microfinance as a tool to address socio-economic
problems

10. Why do MFIs charge high interest rates to poor people?

Concerns often arise as to why micro credit interest rates are higher than the bank interest rates that
wealthier people pay. The issue is cost: the administrative cost of making tiny loans is much higher in
percentage terms than the cost of making a large loan. It takes a lot less staff time to make a single loan
of $100,000 than 1,000 loans of $100 each. Besides loan size, other factors can make micro credit more
expensive to deliver. Credit decisions for borrowers who have neither collateral nor a salary cannot be
based on automated scoring. These decisions require substantial intervention of a loan officer in judging
the risk of each loan. MFIs may operate in areas that are remote or have low population density, making
lending more expensive. This is often why traditional banks tend to stay away from such areas. If an MFI
wants to operate sustainable, it has to price its loans high enough to cover all its costs.

Although micro credit interest rates can be legitimately high, inefficient operations can make them higher
than necessary. As the micro credit market matures in a given country, administrative costs usually drop
as managers learn from experience and in some cases because competition forces lower pricing and greater
efficiency.

11. Why does the microfinance industry place so much emphasis on sustainability?
From a development perspective, financial sustainability is not an end in itself. Rather, it is a tool for
reaching the maximum number of clients. MFIs may only operate for a limited time, reach a limited
number of clients, or be driven more by political goals than by client needs if services are not priced at
sustainable levels.

Donors and governments cannot likely provide enough subsidized funds to meet the huge demand for
microfinance. Even if there were enough donor and government money, it would be better spent on other
development priorities that, unlike microfinance, cannot be delivered without continuing subsidies.
Sustainable MFIs have the potential to attract non-subsidized resources to finance expansion of outreach.
Experience has even shown that borrowers are more likely to repay lenders who operate without subsidies
at they are more confident the institution will be around to give them future loans.

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The trade-off between financial viability and reaching very poor people is much less acute than many once
thought. A number of financial providers have managed to offer high-quality financial services to very
poor people while also covering their costs.

12. Is the microfinance industry sustainable?

Is the microfinance industry financially sustainable—is it profitable after making adjustments for
subsidies not likely to continue in the future? Most MFIs are still unprofitable, especially if one includes
the many small MFIs that do not report to the international databases described in Q 17. A more
meaningful way to look at profitability is to consider the overall number of overall clients served by
profitable MFIs, rather than the number of profitable MFIs themselves. In 2006, 44% of all micro
borrowers captured by the MIX database are being served by profitable institutions. If one narrows the
focus to private MFIs such as NGOs and licensed institutions, then more than 3/5 of the borrowers are
already being served profitably, and the long- term trend is upward.

Are MFIs as profitable as banks? Measured by return on assets, MFIs are on average more profitable than
the commercial banks in their countries. This does not show that microfinance is inherently more
profitable than commercial banking. Rather, the differential is likely due to microfinance being an
immature industry in most countries where providers’ profits have not yet been squeezed down. Measured
by return on the equity invested by shareholders, MFIs are on the average less profitable than banks, but
this is mainly because MFIs are not yet as fully leveraged as banks—i.e., MFIs fund their assets with more
of their own money and less of the money deposited by savers. Even so, well-managed microfinance has
already shown to be profitable enough to integrate into mainstream financial sectors.

13. Do governments do a good job of delivering micro credit?

There are several highly successful government MFIs, such as Bank Rakyat Indonesia’s microfinance
department. However, the vast majority government microfinance programs do a poor job of delivering
retail credit. Such programs are usually subject to political influence, high default, continuing drain on
national treasuries, and sometimes lending based more on the borrowers’ influence than their actual
qualifications. Among government programs reporting to international databases, only 1/8 of clients are
being served sustainably. Sound credit administration requires screening out borrowers who are not likely
to repay, charging interest rates high enough to cover costs, and responding vigorously to late payments.

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The government-run MFIs that deliver good micro credit tend to be insulated from politics, managed by
technocrats, and strongly and explicitly focus on sustainability.
13. What is the government’s role in supporting microfinance?
Government’s most important role is not provision of retail credit services, for reasons mentioned in
Q12. Government can contribute most effectively by:
• Setting sound macroeconomic policy that provides stability and low inflation
• Avoiding interest rate ceilings - when governments set interest rate limits, political factors usually
result in limits that are too low to permit sustainable delivery of credit that involves high
administrative costs—such as tiny loans for poor people. Such ceilings often have the announced
intention of protecting the poor, but are more likely to choke off the supply of credit
• Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has experience
with sustainable microfinance delivery,
• Creating government wholesale funds to support retail MFIs if funds can be insulated from politics,
and they can hire and protect strong technical management and avoid disbursement pressure that
force fund to support unpromising MFIs.

15. How do savings services help poor people?

Savings has been called the “forgotten half of microfinance.” Most poor people now use informal
mechanisms to save because they lack access to good formal deposit services,. They may tuck cash under
the mattress; buy animals or jewelry that can be sold off later, or stockpile inventory or building materials.
These savings methods tend to be risky. Often they are illiquid as well. Poor people want secure,
convenient deposit services that allow for small balances and easy access to funds. MFIs that offer good
savings services usually attract far more savers than borrowers.

16. What is the microfinance industry doing to ensure that the poor do not fall prey to predatory
lenders?
Many countries are concerned about the impact of excessive interest rates, abusive lending practices, and
over-indebtedness on poor borrowers. Quite a few players in the industry are now focusing on consumer
protection issues. Typical consumer protection measures include disclosure requirements, rules and
prohibitions related to lending practices, mechanisms for handling complaints or disputes, and consumer
education.

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Even in countries where consumer abuse is not yet a problem, promoting voluntary consumer protection
codes and practices may reduce future pressure to over-regulate. An increasing number of individual MFIs
are adopting voluntary pledges or codes that promote effective consumer protection and a consumer-
oriented culture. Investors are in the process of signing on to CGAP's Investor Initiative for Client
Protection in Microfinance.

17. What is social performance measurement and why is it important for financial institutions?
The Social Performance Task Force defines social performance as: "The effective translation of an
institution's social mission into practice in line with accepted social values that relate to serving larger
numbers of poor and excluded people; improving the quality and appropriateness of financial services;
creating benefits for clients; and improving social responsibility of an MFI."

Most MFIs have a social mission that they see as more basic than their financial objective, or at least co-
equal with it. Social performance measurement helps MFIs and their stakeholders focus on their social
goals and judge how well they are meeting them.!

The Indian economy cannot grow in a sustainable manner without the contribution of rural India and for
this to happen, financial inclusion needs to be put on a mission mode. We need to address the challenges
of rural economy through greater policy attention and coordinated efforts. By making Indian farmer
globally competitive, we can change face and pace of Indian Agriculture.
*****

<<<<< PLEASE NOTE >>>>>

1. You are required to go through all the FIVE chapters in this module.
2. A test will be conducted in the first week of the academic year.

ALL THE BEST!!!!

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