AEC 302 AGRICULTURAL FINANCE AND CO-OPERATION (2+1)

PRACTICAL MANUAL

Dr.A.VIDHYAVATHI
Dr.R.SANGEETHA

Department of Agricultural Economics

Tamil Nadu Agricultural University
Coimbatore 641 003
2020
 Department of Agricultural Economics
Tamil Nadu Agricultural University
Coimbatore– 641 003

AEC 302 AGRICULTURAL FINANCE AND CO-OPERATION (2+1)

CERTIFICATE

Certified that this is the bonafide record of work done by

Thiru/Selvi _____________________________I.D.No. ________________ of

……………………………… class for the course AEC 302 Agricultural Finance

and Co-operation (2+1) during ………… Semester of the year 20-- - 20---.

External Examiner Course Teacher

NAME : YEAR :
ID No. : BATCH:

Date of Remarks
Ex.
Date Exercise Submissi & Sign
No.
on
Determination of Most Profitable Level of Capital
1.
Use
Optimum Allocation of Limited Amount of Capital
2.
among Different Enterprise
Analysis of Progress and Performance of
3.
Cooperative using Published Data
Analysis of Progress and Performance of
4.
Commercial Banks and RRBs using Published Data
5. Visit to a Commercial Bank, Cooperative Bank/
Cooperative Society to acquire first-hand knowledge
of their management, Schemes and Procedures.
6. Visit to District Central Co-operative Bank (DCCB)
to study its role, functions and procedures for
availing loan-Fixation of Scale and Finance
7. Guest lecture on Role and Functions of Commercial
Bank and Lead Bank/NABARD and its role and
Functions.
8. Estimation of credit requirement of Farm Business -
A case study
9. Preparation and Analysis of Balance Sheet and
Cash Flow Statement- A Case Study.
10 Preparation and Analysis of Income Statement- A
Case Study
11 Exercise on Financial Ratio Analysis. Appraisal of
Farm Credit Proposals- A Case Study
12. Undiscounted Methods and Discounted Methods
13 Loan Repayment Plans
14. Preparation of Bankable Projects/ Farm Credit
Proposals and Appraisal
15. Techno- Economic Parameters for Preparation of
Projects for Various Agricultural Products and its
Value added Products – Seminar on Various Topics
16. Analysis of Different Crop Insurance Products /Visit
to crop insurance implementing agency
Ex.No: 1 Determination of Most Profitable Level of Capital Use
Dt:
Factor product relationship is essential in farm management because it helps to
answer the question like what level of output (How much to produce) to be produced in a
farm i.e in each crop or livestock enterprise on a farm? It would help us in finding not only
the optimum level of output but also the optimum level of the variable inputs. A factor product
relationship is considered as one of the basic relationships in production economics
Agricultural Production Function
The mathematical representation of the input-out relation is called as agricultural
production function.
A production function thus, is a mathematical relationship describing the way in which
the quantity of a particular product depends on the quantities of the different inputs which are
used for its production.
Y = f(X1, X2, X3/ X4……XN)
The level of production of Y (output) depends on, or is a function of x1, x2, x3……xn
factors of production. All the variables, including the dependent variable y, may be
expressed only in physical or value terms.
The nature of the production function is determined by the physical, biological and
chemical properties of the inputs used. In the short run, this analysis is known as law of
diminishing return or law of variable proportion. Actually this refers to the study of output or
return in situations where the proportion of inputs (variable inputs to fixed inputs) are varied,
hence this principle is called as law of variable proportion.
The objective of factor-product analysis is (a) to find out the profit maximising level of input
use, given the input cost and output price.
The decision rule to find out the optimum input use is MVP=MIC

i.e  Y/  X  Py = Px
MPPPy = Px
In tabular method, profit is calculated as Y. Py – X. Px, and the profit maximizing level is
found out.
COST CONCEPTS
The cost concepts show the relationships between the output and cost incurred to produce
that output.
C = f (Y). Costs are derived from the functional relation between input and output as
determined by the factor product relationship. There are seven types of costs namely,
1. Fixed cost or Total Fixed Cost (TFC)
TFC denotes those costs, which do not vary with the level of production, and are
incurred even when production is not undertaken. TFC is straight line parallel to X-axis.
2. Variable cost or Total Variable Cost (TVC)
 TVC denotes those costs, which do vary with the level of production and incurred
only when production is undertaken. TVC has an inverse S shape and reflects the law of
variable proportion.
3. Total Cost (TC) = TFC + TVC
= TFC + Px.X. Where, X = variable input and Px = Price of variable input.
4. Average Fixed Cost AFC =TFC / Y
Where, Y = output
5. Average variable Cost AVC =TVC / Y
6. Average Total Cost ATC =TC / Y i.e ATC = AFC + AVC

7. Marginal Cost MC =  TC /  Y
To find out the optimum level of output which maximizes the profit level of business.
The decision rule to find out the optimum level of output is MC=MR
i.e  TR/  Y =  TC/  Y
Exercise.1:
From the data given below find out
(i) TC, AFC, AVC, ATC, MC if the price of input = RS 20/kg & TFC = Rs 4000.
(ii) Workout the profit if the price of output Rs.8/kg.
Fixed
Input Output
Cost
(x) Qty (y)
in Rs
0 4000 0
20 4000 500
40 4000 1100
60 4000 1750
80 4000 2250
100 4000 2550
120 4000 2700
140 4000 2750
160 4000 2750
180 4000 2700
200 4000 2600

Exercise No.2:
For the given product and cost relationship, work out the Average physical product, Marginal
physical product, Total variable cost, Average variable cost, Average fixed cost, Total cost,
Average total cost and marginal cost and determine the most profitable yield of jatropha for
the following data, when the cost of N is Rs.10/kg and the price of Jatropha is Rs.40 per unit

Outpu
Input
t
(X1)
(Y) in TFC
N in
Kgs
kgs
(TPP)
0 0 5000
20 50 5000
40 110 5000
60 175 5000
80 225 5000
100 255 5000
120 270 5000
140 275 5000
160 275 5000
180 260 5000
200 250 5000
Ex.No:2 Optimum Allocation of Limited Amount of Capital Among
Different Enterprises
Dt:

Introduction
Any resource that helps in the production process is called an input. Since the input
is to be purchased with money, this is also called as a financial input. Capital refers to any
financial input that is purchased and owned by a farmer and used for generating further
income in agriculture. There are three principles or decision making tools we can employ to
allocate limited capital among different enterprises namely optimal financial input , maximum
revenue combination of enterprises and principles of Equi Marginal Returns. We will discuss
one by one
1.Optimal financial input level:
Use of an input in a production produces leads to the generation of output. Total physical
product (TPP) is the amount of output generated using a certain amount of financial input. If
the TPP is multiplied with the per unit price of output, then the total value product (i.e. TVP)
is obtained. Similarly, total input cost is the product of total financial input and per unit price.
Now, the optimal financial input level can be obtained by using the concepts of TVP and TIC.

An optimal financial input level is one wherein the cost of using per unit of input will
be equal to the returns from per unit of output generated by using the input. For example, if
the cost of 1 kg additional Urea is Rs.6.5 and if it leads to additional rice production of 0.25
kg which in turn gets sold for Rs.6.5 then this is what is called as optimal level of a financial
input. It is the profit maximizing financial input level.
Accordingly, both MVP (Marginal Value Product) and MIC (Marginal Input Cost) are
need to work out the optimal input level of financial input.
MVP is the additional income realized from using the additional unit of a financial
input. It is derived from the following expression:
Δ TVP
MVP = ----------------------------------
Δ Financial input level

MIC is defined as the additional change in the total input cost by using an additional
unit of a financial input. The relevant expression is as follows:
ΔTotal input cost
MIC = ----------------------------------
ΔFinancial input level

This way, MVP = MIC is considered as optimal financial input level.

Example
Table 2.1: Estimation of optimal financial input level
Unit price of a financial input, Px = Rs.100
Unit rice output, Py = Rs.10

Units of TPP MPP TVP MVP TIC Units MIC

finance (Y) ΔTPP TPP x ΔTVP of finance ΔTIC
in ’00 (in kg) -------- Py -------- x --------
Rs.(X) ΔX ΔY Px ΔX
0 0 - 0 - 0 -
1 14 14 140 140 100 100
2 35 21 350 210 200 100
3 48 13 480 130 300 100
4 59 11 590 110 400 400
5* 69 10 690 100 500 100
6 73 4 730 40 600 100
7 70 -3 700 -30 700 100
8 68 -2 680 -20 800 100
9 62 -6 620 -60 900 100
10 54 -8 540 -80 1000 100
* Optimal financial input level is the profit maximizing level of the input.
Decision Rule
It is to be noted that MVP and MIC values in Table 2.1 are used to determine the
optimal financial input level. In the first four rows of the table MVP is greater than MIC. At
the fifth financial input level. MVP and MIC are exactly equal. At this point the additional
income and the additional financial input are equal in their values.
Beyond the fifth unit of financial input, MVP is less than MCI implying profit reduction
as more units of financial inputs are applied. Therefore, the profit maximizing financial input
level is at the point where MVP = MIC.
The following decision rule can be deducted from the foregoing analysis.
 If MVP > MIC, the marginal output enhances profit;
 If MVP < MIC, the marginal output decreases the profit; and
 If MVP = MIC, profits is at its highest level.

Implications for the farmer

When MVP > MIC, a farmer should increase the present level of financial input use
(i.e. invest more in the purchase of inputs). At the same time, when MVP < MIC a farmer
should spend less in purchasing the input as profits would be lower than the cost
component.
2.Revenue Maximizing Combination Enterprises:
An enterprise refers to a series of activities carried out by the farmer to realize an
output which in turn can be sold off in the market to raise income which is sufficient not only
for improving his living standard but also to repay the loan component. Such an enterprise
can be crop, dairy, apiculture or even mushroom.
Returns from a combination of enterprises will always be better than the returns
obtained from a single enterprise. That is why, it is always profitable for a farmer to use the
loan obtained in such an enterprise combination that gives him greatest net income. The
profit maximizing enterprise combination is called as optimal enterprise combination.
When resources are limited, the principle of optimal enterprise combination assumes greater
importance in selecting combination of enterprises.
Optimal enterprise combination
A profit maximizing enterprise combination lies in the equilibrium between realized
output of the enterprises and the price ratio. In other words, optimal enterprise combination
is the trade-off between the enterprises and price ratio. This trade-offline is called
production possibility curve (PPC) which represents all possible combinations of two
products that could be produced with a given quantity of inputs. Substitution ratio is the
slope of product possibility curve.
For determining the combination of two enterprises, we need another tool of analysis.
This is called an iso-revenue line which shows all possible combinations of two products
which would yield the same total revenue. The slope of iso-revenue line is the inverse price
ratio.
Substitution ratio (also called as Marginal Rate of Product Substitution (MRPS) and
price ratio are to be compared for knowing the optimum enterprise combination.
Substitution ratio (MRS): A substitution ratio is also called as the marginal rate of
substitution (MRS). It can be defined as the ratio of quantity of output lost of one enterprise
to the quantity of output gained of another enterprise. As shown in figure 2.1. The
specification of MRPS is given by,
Quantity of output lost ΔY2
Substitution ratio (MRPS) = ---------------------------------- = ------
Quantity of output gained ΔY1

Inverse price ratio (PR): The slope of iso-revenue line is the inverse price ratio. PR can be
defined as the ratio of unit price of output gained of one enterprise to the unit price of the
output cost of another enterprise. The formula of a price ratio can be given as:

Unit price of output gained ΔPY1

Price Ratio = -------------------------------------- = ------
Unit price of output lost ΔPY2

Optimal enterprise ratio is the point where substitution ratio will be equal to the
inverse ratio i.e. MRPS = PR.
Profit is maximized at the point where substitution ratio is equal to inverse price ratio,
which can be given by:
ΔY2 ΔPY1
------- = ------
ΔY1 ΔPY2
Graphical representation
The optimal enterprise combination can also be graphically expressed as shown in
figure 2.1. The optimal product combination is at a point wherein the iso-revenue line is
tangent (i.e. a straight line touching but not intersecting a curve) to the production possibility
curve. At this point of tangency, the slope of production curve (MRPS) will be equal to the
slope of iso-revenue line (PR).

Decision Rule
It could be seen from the figure 2.1 that Y1 is the output gained of one enterprise and
Y2 is the output lost of another enterprise.
If MRPS < PR, then substitution should continue by moving downwards to the right on the
PPC. In other words, a farmer should sacrifice Y2 and add more and more quantities of Y1.
If MRPS > PR, then there is too much of substitution of Y2 for adding Y1. Thereby, the
adjustment should be made upwards (to the left of PPC) in such a way that Y2 needs to be
added more while Y1 should be replaced till MRS becomes equal to PR.
Example:
Suppose Mr. Krishnan, a farmer based at Ooty, has Rs.10,000 to invest in the
product combination of wheat (Y1) and Cumin (Y2). Suggest him a suitable product
combination with the following yield levels given the price of wheat (P0) being Rs.4.20 per kg
and price of cumin (Py2) being Rs.6.00 per kg.
Wheat yield (Y1) in kg 0 20 40 60 80 100 120
Cumin yield (Y2) in kg 60 56 50 41 30 16 0

Solution:
As it could be seen from the given data, there are 7 levels of output combinations. It
is also seen that wheat yield (Y1) is added and cumin yield is sacrificed (Y2). Before
obtaining optimal combination, it is necessary to determine the additional yield that is gained
(ΔY1) or the additional yield that is cost lost (ΔY2).
Table 2.2: Enterprise combination of wheat and cumin with Rs.10,000 investment
MRS of Y1 Price Ratio
Product Combination for Y2 (Py1/Py2)
Wheat Yield (Y1) (kg) Cumin Yield (Y2) (kg) (MRSY1Y2)
Level Y1 Δ Y1 Y2 Δ Y2
1 0 - 60 - -
2 20 20 56 4 0.20 0.70
3 40 20 50 6 0.30 0.70
4 60 20 41 9 0.45 0.70
5 80 20 30 11 0.55 0.70
6* 100 20 16 14 0.70* 0.70*
7 120 20 0 16 0.80 0.70
* Optimal enterprise combination
Inference
In the wheat-cumin enterprise combination with an investment of Rs.10000, The
optimal enterprise combination is attained at the 6th level of enterprise combination. This is
where the income will be maximum for the farmer. The substitution process needs to be
stopped beyond this level as any combination after the optimal level will result in lesser
income. Any combination above the optimal level is supra-optimal and substitution should
be continued as there is scope for more profit.
3.Principle of Equi-Marginal Returns
As finance is always a limiting factor, a farmer must prudently decide as to how the
available finance should be allocated or used among many possible alternatives. Decisions
are to be made on the best allocation of limited financial input among many acres of crops,
different types of livestock etc. The equi-marginal principles provides guidelines and
ensures that allocation is done in such a way that profit is.

Suppose a farmer has 5 units of capital (X), he will allocate each successive Suppose a
farmer has 5 units of capital (X),he will allocate each successive unit of X to the enterprise
in which VMP is the largest. Since marginal returns in monetary returns, it is also called as
VMP i.e. value of the marginal product.
Definition: The law of equi-marginal returns states that profit from a limited amount
of variable input (e.g. finance) is maximized when that input is used in such a way
that marginal return from that input is equal in all the cases.
Specification: VMPx1 = VMPx2 =….. VMPx11

This law suggests that the limited available resources should be invested keeping in view
that how much marginal (added) returns the farmer is getting from that enterprise and not on
how much he is getting average returns.
Example
A farmer based at Cuddalore district has Rs.5000 and wants to grow castor, wheat
and cumin that are suitable for his farm situation. What amount of money should be spent
on each enterprise to obtain highest profit?
Solution:
Table 2.3: Average returns obtained out of investment.
Marginal Returns (Rs.)
Investment (Rs.) Castor Black gram Maize
1000 1800 3000 2000
2000 1200 2800 1600
3000 1000 2300 1200
4000 900 1400 800
5000 800 1000 600
Average returns (Rs.) 5700 10500 6200
Net Profit (Rs.) 700 5500 1200

From the above table it is found that the investment of Rs.5000 yield maximum
average returns from cumin enterprise. But if a farmer is investing his amount of Rs.5000
keeping in view the marginal (added) returns, the profit he can earn is indicated in Table 2.4
which is as follows:

Table 2.4 Additional (marginal) returns of the amount invested

Stage Amount of money invested on Marginal returns
(Rs.) (Rs.)
st
1 1000 Black gram 3000
nd
2 1000 Black gram 2800
3rd 1000 Black gram 2300
th
4 1000 Maize 2000
5th 1000 Castor 1800
Total 5000 11,900
investment
Net profit (Rs.) 6,900

Decision Rule
The limited availability of financial input must be allocated among the three crops in
the following manner using VMPs. First three units should be allocated to Cumin and one
unit each to wheat and castor. This enterprise combination can alone lead to maximum
income (Rs.11,900) such as Total income = Rs.11900 (3000 + 2800 + 2300 + 2000 + 1800).
The optimal allocation for maximizing returns is as follows:

Table 2.5: Principle of Equi-Marginal Returns.

Stage Investment Crop Benefit Marginal
returns
1st Rs.3000 On Cumin Added returns Rs.8100
2nd Rs.1000 On Wheat Added returns Rs.2000
3rd Rs.1000 On Castor Added returns Rs.1800
Total Rs.5000 Rs.11,900
Net profit = Marginal returns – Investment = 11,900-5000 = Rs.6,900/-

Thus, the total marginal returns and net profit of Rs.11,900 and Rs.6,900 respectively
are greater than the average returns and net profit of Rs.10,500 and Rs.5,500 respectively of
the most profitable single enterprise i.e. cumin. Henceforth, for maximization of returns
resource allocation should be done in view of marginal (added) returns rather than that of
average returns.
It is observed from the above table that cultivator is getting total net profit of
Rs.11900 which is more than the profit from any single enterprise. Here the condition MU of
Wheat = MU of castor i.e. 2000 = 1800 is also satisfied. Any other allocation of the last
amount of money shall give lesser returns.
Practical Utility
The law of Equi-Marginal Returns can guide the farmer to plan his budget for the
preparation of his cropping scheme. It can also provide guidance to the adoption of
diversified or specialized farming depending upon the conditions and needs of the farming
community.
*********************
Exercise 1: Estimate the optimal financial input level for the following data wherein the
unit price of groundnut is Rs.25 and each financial input is worth Rs.8.20.
Level of 5 10 15 20 25 30 35 40
financial input
(Rs.) (X)
Groundnut 140.71 141.72 144.4 145.49 147.10 147.23 147.53 147.61
yield (kg) (Y)

Exercise 2:Graphically explain optimal enterprise combination (use data in exercise 1.).

Exercise 3: Suppose Mr.Selva Kumar, a farmer based at krishnagiri district, has Rs.25 lakh
to invest in the green house to realize a product combination of tomato (Y1) and capsicum
(Y2). Suggest him a suitable product combination with the following yield levels given the
price of tomato (py1) being Rs.14.75 per kg and price of capsicum (Py2) being Rs. 60.50 per
kg.

Tomato yield (Y1) in Qtl 25 50 75 100 125 150 175

Capsicum yield (Y2) in Qtl 72 68 62 53 42 28 10
Exercise 4: Apply equi marginal returns principle to optimally allocate the capital
resource.
Amount of capital used in Rs. Added Returns in Rs

Crop Dairy Poultry

First 10000 20000 19000 21000

Second 10000 19000 18000 19000

Third 10000 15000 15000 15000

Fourth 10000 12000 11000 12000

Fifth 10000 10000 9000 11000

Total returns 50000 76000 72000 78000

from Rs.

Net profit Rs. 26000 22000 28000

Table: Expenditure according to principle of equi marginal return

Year Amount Enterprise Marginal Return

First 10000

Second 10000

Third 10000

Fourth 10000

Fifth 10000

Total 50,000

Net
Profit
Ex.No:3 Analysis of Progress and Performance of Cooperatives
Using Published Data
Dt:

Introduction
The adoption of capital intensive modern technologies has commercialized the
agricultural landscape in India. As finance plays a major role in the operationalization of
agricultural itself, the performance of a financial institution needs to be analyzed. CAMEL
model is basically an approach widely used to measure the performance of a banking unit.
CAMEL is an abbreviation stands for Capital adequacy, Assets quality, Management
efficiency, Earning quality and Liquidity. It is a supervisory rating system originally
developed in the USA to classify a bank’s overall condition.
CAMEL model indicators:
Group Ratio Formula Inference
CRAR (Net Capital Funds / It refers to the shock
Risk Weighted absorption capacity of a bank
Capital Assets) x 100 to handle the losses without
C Adequacy Debt Equity Ratio Total Debts / Total disturbing its normal functions
Equity
Coverage Ratio [Total Advances /
Total Assets]*100
Assets Net NPA’s to (Net NPAs / Total The dimension of asset quality
A Quality Total Assets Assets)* is an important factor to help
Ratio 100 the bank in understanding the
Net NPA’s to Net (Net NPA’s/ Net risk on the exposure of the
Advances Ratio Advances) *100 debtors. Banks need to limit
Total Investment (Total Investment / non-performing loans to a
to Total Assets Total Assets)*100 small percentage.
M Managem Credit Deposit (Total Advances / Management quality reflects
ent Ratio Total Deposits)*100 the management soundness of
Efficiency Debt Equity Ratio Total Debts / Total a bank. It indicates the bank’s
Equity compliance with set standards
Coverage Ratio [Total Advances / and its ability to respond to
Total Assets]*100 changing environment.
D Earning Return on (Net profit after Tax / Earning is an important
Quality Average Assets Average assets)*100 parameter to measure the
Ratio (ROA) financial performance of an
Debt Equity Ratio Total Debts / Total organization. Earning quality
Equity mainly measures the
Coverage Ratio [Total Advances / profitability and productivity of
Total Assets]*100 the bank, explains the growth
and sustainability of future
earnings capacity
L Liquidity Cash Assets to (Cash Assets / Total Liquidity is very critical for
Total Assets Assets)*100 banks and the confidence of its
 Ratio customers mainly rests upon
Cash Assets to (Cash Assets / Total the banks’ ability to meet its
Total Deposits Deposits)* 100 immediate commitments. This
Ratio emphasizes that banks should
Coverage Ratio (Government always maintain adequate
Securities / Total liquidate level.
Assets)* 100
Note:
Net-worth or equity of a bank refers to its share capital + reserves + surplus; Debt
refers to its total borrowings from RBI; Deposits refer to both savings and term deposits;
interest income refers to the income from lending operations on advances, dividend income
and deposits from RBI; Net NPA’s refer to Gross NPA’s – Provision of the NPA that will not
be recovered; Average assets refers to the average of the total assets in two successive
financial years; Risk-weighted risks refers to the amount of funds that the banks have to set
aside (depending on the risk) before lending credit; and Advances refer to lending of a loan
with a limit for the borrower to withdraw and repay.
Example 1.
Capital Adequacy
Capital Adequacy Ratio (%) Debt-Equity Ratio Coverage Ratio (%)
Net capital 1,01,53,373 Total Debts 1,05,10,193 Total Advances 3,12,22,625
Funds
Risk weighted 4,14,79,179 Total Equity 99,72,137 Total Assets 4,39,86,274
Assets (TA)
Net Capital 24.48% Debt to Equity 1.05 (Total Advances 70.98%
Funds / RWA x Ratio (TA) x 100
100
Assets Quality
Net NPA’s to Total Assets Net NPA’s to Net Advances Total Investment to Total
Ratio Ratio Assets Ratio (%)
Net NPA’s 30,49,148 Net NPA’s 30,49,148 Total Investment 60,24,175
Total Assets 4,39,86,274 Net Advances 3,08,90,914 Total Assets 4,39,86,274
[Net 6.93 % [Net NPA’s/Net 9.87 % [Total 13.70 %
NPA’s/Total Advances] x 100 investment/Total
Assets] x 100 Asset] x 100
Management Efficiency
Credit Deposit Ratio(%) Business/ Employee Ratio Profit/Employee Ratio
Total 3,12,22,625 Total Advances + 5,89,12,829 Net Profit after 39,42,808
Advances (TA) Total Deposits tax
Total Deposits 2,76,90,204 Total no. of 56 Total no. of 56
Employees Employees
(TA/Total 111.81 % Business/Employee 10,52,015 Profit/Employee 70,407
Deposits) x ratio ratio
100
Earning Quality
Return on Average Assets Net Interest Margin Ratio (%) Return on Equity (%)
Ratio (%)
Net Profit after Net interest income 33,24,054 Net Profit after 39,42,808
tax tax
Average Average earning 3,48,33,510 Total Equity 99,72,137
Assets assets
(Profit/Average Net interest 9.54 % [operating 39.53 %
Assets)* 100 income/Average profit/Equity] x
earning assets* 100 100
Liquidity
Cash Assets to Total Cash Assets to Total Deposits Government Securities to
 Assets Ratio (%) Ratio (%) Total Assets Ratio (%)
Cash Assets 30,08,186 Cash Assets 30,08,186 Government 45,18,131
(CA) securities
Total Assets 4,39,86,274 Total Deposits 2,76,90,204 Total Assets 4,39,86,274
(TA)
[CA/TA] x 100 6.83 % [CA/TD] x 100 13.08 % [Govt 10.27 %
securities/TA] x
100
 Progress and Performance of Cooperative Banks in India
Year 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
Number of societies 46222 89523 90279 101297 90958 93042 92789 93367 95595 95238
Total Members 56821 122226 106136 127646 110068 130120 121088 127322 131235 130547
Total no of Borrowers 27317 57802 47714 52374 42629 48081 49858 46214 52017 50690
(in 000)
Paid up capital 2786 6828 7005 9467 8008 9789 11068 12281 14122 14142
(crores)
Total Reserves 2252 5350 6417 8565 6668 9135 10607 12162 18860 16800
(crores)
Total Deposits 13375 35680 37282 54763 37561 81895 84616 101065 115884 119632
(crores)
Total Borrowings 21375 49074 48226 97564 81385 95836 99980 112690 124831 128333
(crores)
Total Working Capital 41466 130314 109385 173564 148939 212429 223711 201304 239967 243563
(crores)
Total Loans Issued 27465 72882 85296 122826 98440 171420 159050 180824 200678 207322
(crores)
Total Loans 28515 80487 79504 103462 91171 130054 147226 158487 170459 169630
Outstanding (crores)
Total Demand 31978 92557 85757 101782 95926 155853 159626 169783 200464 196750
(crores)
Total Collection 22760 54271 64490 76705 70346 126221 123835 139894 147171 148834
(crores)
Overdue 9219 38282 21428 25234 25580 29632 35791 29889 53293 47915
Average member per
society
Proportion of
Borrowing Members
Source: NAFSCOB

Exercise 1. Work out CAMEL indicators for Cooperative banks

Ex.No:4 Analysis of Progress and Performance of Commercial
Banks and RRB’s Using Published Data
Dt:

Exercise 1.The following is the hypothetical financial data of the Commercial

Cooperative Bank Limited based at INDIA. Work out CAMEL indicators
Total Debits: Total Advances: Net Advances:
Rs.3,05,10,193 Rs.5,27,42,128 Rs.
Total Equity: Risk Weighted Assets: Total Investment:
Rs.1,05,10,193 Rs.7,27,68,052 Rs.87,49,125
Net NPA’s: Total Assets: Total Deposits:
Rs.87,32,114 Rs.8,12,22,625 Rs.2,13,85,926
Total Employees: Gross Returns: Tax Rate:
65 Rs.92,43,129 30 %
Average Assets: Net Interest Income: Average earning Assets:
Rs.7,67,88,910 Rs.29,34,128 Rs.5,21,05,129
Net Capital Funds: Cash Assets: Government Securities:
Rs.2,50,87,465 Rs.1,76,18,423 Rs.32,12,221
Financial Indicators of Commercial Banks in India
Year 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005
No. of Banks 149 148 147 147 146 155 173 167 167 170 173 182 222 288
2584616 1111144 1009265 9433838 8533173 7429677 645354 561587 474691 406320 332006 269693 216468 183755
Deposits 8 81 13 0 0 2 85 43 96 11 16 65 17 94
8745977 8116109 7896467 7388160 6735213 5879773 507355 429748 349672 299992 247693 198123 151681 115083
Advances 5 0 0 0 2 3 92 75 00 39 60 63 14 63
10379 10994 11608 12223
Branches 42336 48482 54628 60774 67562 72906 78215 85262 92114 97649 5 2 8 3
Capital
Investment 295893 83044 47037 -35559 63170 -17136 38305 33443 -13627 46148 20770 47832 107956 112489
1525329 1417460 1312928 1203699 1097592 9589952 832089 718339 602692 523864 432616 345996 278586 235550
total assets 25 65 82 21 85 1 03 78 52 22 60 18 33 93
1525329 1417460 1312928 1203699 1097592 9589952 832089 718339 602692 523864 432616 345996 278586 235550
Total liabilities 25 65 82 21 85 1 03 78 52 22 60 18 33 93
Net profit -324377 438995 341482 890778 809127 911647 816583 703313 571092 527499 427259 312026 245818 209582
NPA 3206163 2051618 1766589 804827 666446 495857 405506 315788 306806 207347 133958 80821 53551 58762
Cash Deposit
Ratio 6.19 6.12 5.59 5.60 5.53 5.05 5.79 8.17 7.71 7.32 9.73 7.24 6.67 6.43
Credit Deposit
Ratio 74.16 73.04 78.24 78.32 78.93 79.14 78.62 76.52 73.66 73.83 74.61 73.46 70.07 62.63
Investment -
Deposit Ratio 34.99 32.87 32.97 31.56 33.79 35.17 34.62 34.25 36.42 35.68 35.46 35.26 40.03 47.33
104852
No. of Workers 1335702 1300008 1256085 1180069 1150281 1096980 970782 950178 937445 907337 896343 876955 858560
0
Source: Collected and compiled from year wise RBI data base]

Exercise 2: Work out CAMEL indicators for commercial banks

Ex.No:5 Visit to a Commercial Bank, Cooperative Bank/
Cooperative society to acquire first- hand knowledge of
their management, schemes and procedures
Dt:

Primary Agricultural Credit Societies (PACS) / Primary Agricultural Co-operative

Banks
The Formation of these societies dates back to 1904 when the first credit societies
Act was passed. The objective was to provide cheap credit to the farmers in order to relieve
them from teas clutches of money lenders. The main functions of the PACS are:
i) to promote economic interests of the members in accordance with the co-
operative principles;
ii) to provide short and medium term loans;
iii) to promote savings habit among members;
iv) to supply agricultural inputs like fertilizers, seeds, insecticides, implements,
etc.;
v) To provide marketing facilities for the sale of agricultural produces; and
vi) To supply domestic products requirements such as sugar, kerosene, etc.

Management: The general body elects a managing committee which consists of five to nine
members and elects a president and a secretary to look after the day – to – day activities of
the society. All the office bearers render honorary service. The RBI has given a directive to
appoint a full time paid secretary to maintain the accounts for each society.
Membership: All agriculturists, agricultural labourers, artisans and small traders in the
villages can become members of ht society.
Share Capital: PACS issue ordinary shares of small value, i.e., Rs.10 and Rs.50 each to
their members. The ownership of shares decides the rights and obligations of the holder to
the society. Share capital forms an important part of the working capital. Members’
borrowing capacity is determined by the number of shares held by them.
Liability: Initially, societies were formed with unlimited liability.
Sources of Funds: Share capital, entrance fee, deposits, reserve fund, and loans borrowed
from higher institutions and government are sources of funds of the co-operative societies.
PACS obtain loans from CCB or SCB to cater to the needs of their members. The
maximum borrowing power of the society is based on its liability and it differs from state to
state. It is generally fixed at 1/6th or 1/8th of the total value of the net assets of the solvent
members. Credit limit is fixed by the Registrar or CCBs on the basis of the factors viz., total
assets of the members’ income and repaying capacity of members, owned funds of the
society, audit classification and repayment performance.

Exercise: Visit to PACB and collect details on administrative set up / management,

membership, share capital, sources of fund, area of operation, loans and other facilities
provided to farmers and others etc.,.
Ex.No:6 Visit to a District Central Co-operative Bank (DCCB) to
study its role, functions and procedures for availing
loan- Fixation of Scale of Finance
Dt:
District Central Co-Operative Banks (DCCBS)
CCB / DCCBs form an important link between PACS and SCBs.
Functions: The major functions of CCB / DCCBs are:
a. to meet the credit requirements of member societies;
b. to perform banking business; to act as balancing centres for the PACS by diverting the
surplus funds of some societies to those which face shortage of funds;
c. to guide and supervise the PACS; and
d. to undertake non-credit activities.
The area of operation is generally a district. All types of co-operative societies such
as marketing societies, consumers' societies, farming societies and urban co-operative
credit societies apart from PACS can become member of CCB / DCCBs.
Sources of Finance: These banks raise funds by way of share capital, deposits from public,
borrowings from SCBs, government, RBI, SBI and commercial banks. The borrowing power
of these banks ranges from 12 to 15 times of their paid-up share capital and reserve fund.
Loaning Policy: These banks generally extend short and medium term loans to PACS for
financing agricultural activities. Loans are granted against proper security, landed assets,
house mortgage, cattle, agricultural produce, jewels etc.
The number of CCB / DCCBs has declined due to reorganization. Because of various
reasons, the percentage of overdue has increased from 8.7 per cent in 1950 -51 to 43 per
cent in 1990-91.
Management: The management of these banks is vested with Board of Directors consisting
of 12 to 15 members. A DCCB is considered weak when its estimated bad and doubtful
debts, other over dues above three years and accumulated losses exceed 50 percent of its
paid-up capital and reserves. Rehabilitation programme is being implemented to revitalize
such weak DCCB. As on June 30, 1988, as many as 176 DCCBs were identified as weak
and put under rehabilitation programme.
State Co-Operative Bank (SCB)
It is the apex institution at the state level which links widely scattered PACS with the
money market, Reserve Bank of India and the Cooperative
movement. The main objective of the bank is to link the widely scattered PACS with the
money market and the RBI and to co-ordinate the work of CCB / DCCBs.
The Functions of SCBs are:
a) to act as bankers' bank to DCCBs and to supervise, control and guide them;
b) to mobilize financial resources needed by the PACS and deploy them properly among
the various sectors of the movement;
c) to co-ordinate the various development agencies and he1p the government in drawing
plans for co-operative development and their implementation;
d) to formulate and execute uniform credit policies for co-operative movement;
e) to perform banking functions such as issuing cheques, drafts, letters of credit (by issuing
letter of credit, a banker requests another party (a banker or trader) to grant a specified
amount to a third party specified therein and the issuing banker himself binds to pay the
money paid under the letter of credit), collecting and discounting bills, etc.
 Progress of Cooperative Banks: A. Central Cooperative Banks
(Amount in Rs.Crores)
Year 2008- 2009- 2010- 2011- 2012- 2013- 2014-15 2015-16 2016-17 2017-18
09 10 11 12 13 14
Number of 46222 89523 90279 101297 90958 93042 92789 93367 95595 95238
societies
Total 56821 122226 106136 127646 110068 130120 121088 127322 131235 130547
Members
Total no of 27317 57802 47714 52374 42629 48081 49858 46214 52017 50690
Borrowers (in
000)
Paid up capital 2786 6828 7005 9467 8008 9789 11068 12281 14122 14142
(crores)
Total Reserves 2252 5350 6417 8565 6668 9135 10607 12162 18860 16800
(crores)
Total Deposits 13375 35680 37282 54763 37561 81895 84616 101065 115884 119632
(crores)
Total 21375 49074 48226 97564 81385 95836 99980 112690 124831 128333
Borrowings
(crores)
Total Working 41466 130314 109385 173564 148939 212429 223711 201304 239967 243563
Capital
(crores)
Total Loans 27465 72882 85296 122826 98440 171420 159050 180824 200678 207322
Issued (crores)
Total Loans 28515 80487 79504 103462 91171 130054 147226 158487 170459 169630
Outstanding
(crores)
Total Demand 31978 92557 85757 101782 95926 155853 159626 169783 200464 196750
(crores)
Total 22760 54271 64490 76705 70346 126221 123835 139894 147171 148834
Collection
(crores)
Overdue 9219 38282 21428 25234 25580 29632 35791 29889 53293 47915

Area of Operation and Membership

Area of operation is within the state. Each state has one apex bank. Some
States have more than one as in Maharashtra, Madhya Pradesh, Punjab and Andhra
Pradesh. Membership is open to all CCB / DCCBs and such other societies, which have
direct dealings with SCBs and State Governments, have now become shareholders in order
to strengthen and influence their borrowing power.
Management: While the main authority of SCBs is vested with the General Body, powers of
day-to-day functioning rests with the Board of Directors. As a share holder, the government
nominates some directors and the rests are selected by the General Body. The General
Body meets once in a year.
Sources of Finance: The sources of these banks are share capital, reserve funds, deposits
from members and non-members, borrowings from NABARD, SBI, State Government and
direct state contributions. The ceiling on borrowing varies from 12 to 20 times of the owned
funds.
Loaning Policies: SCBs provide short-term loans to meet expenses of agricultural
operations, marketing of agricultural produces and distribution of controlled commodities.
They grant medium term loans for the purchase of cattle, machineries, reclamation of land,
renovation of wells, tanks and channels, construction of farm sheds and godowns, etc.
Loans are granted to the member societies through their branches.
Ex No: 7 Guest Lecture on Role and Functions of Commercial
Bank and Lead Bank/ NABARD and its Role and
Functions
Dt:

Functions of Commercial Bank

 Wider territorial and regional spread of branch net work;
 Faster mobilization of savings through bank deposits; and
 Deployment of bank credit in favour of neglected sectors the economy.

In order to achieve these objectives, the commercial banks involved in the following
activities:
i) Commercial banks provide both direct and. indirect finance farmers. Banks provide
direct finance to farmers for the purchase pump-sets, tractors and other agricultural
machineries, for sinking and (deepening wells, for land development, for raising crops, and
for setting up of dairy, sheep/goat, poultry, fishery, piggery and sericulture units.
Commercial. banks also provide indirect finance which includes loan for distribution of
fertilizers and other inputs, loan to electricity boards, loan to primary Agricultural credit
societies and subscribing to debentures of land development banks.
ii) They extend financial assistance to small/marginal farmers identified by District Rural
Development Agency (DRDA).
iii) They established specialized branches exclusively for rural lending. They finance
PACS ceded to them and organize Farmer’s Service Societies (FSS) since 1973-74.
iv) They have set-up Regional Rural Banks, F.S.S and LAMPS in selected areas to
cater to the credit needs of the weaker sections.
Lead bank scheme was launched based on the recommendations of the Gadgil study
Groin of National credit council constituted in 1968 for suggesting an organizational frame
work for the implementation of social objectives aimed at identifying territorial and functional
credit gap and of making recommendation for the extension of institutional credit.
The scheme was introduced in 1969. Under this scheme, each district has been
allotted, to a prominent commercial bank in the district and it will play a lead role in
promoting the development schemes in co-ordination with other banks and the central and
state Government agencies, the twin objectives of the Lead Bank Scheme are:
 To launch a programme of rapid branch expansion particularly in unbanked and
under banked areas; and
 To ensure adequate flow of institutional credit to the neglected and weaker
sections of the community to fill up spatial and sectoral credit gaps.

Function of the lead bank

 It acts as a consortium leader among the bank branches functioning in the district
 It undertakes surveying, of credit needs, development of branch banking and
expansion of credit to weaker and neglected sections of the society. For this
purpose, the District credit plan (DCP) is prepared by the lead bank. DCP is
prepared in line with the development strategy worked out for the district by the
government and national plan objectives. After the preparation of credit plan, credit
 plan targets are allotted among different financial institutions in the districts.
District Consultative Committee (DCC)
It is an important forum at the grass root level for the co-ordination of the activities of
the financial institutions. Meetings will be convened once in three months. The members of
DCC Are representatives from Lead Bank, commercial banks (including co-operatives / LDB)
operating in that area, officials of the development Departments and NABARD. The district
collector is the chairman.
The functions of DCC are:
i) Allocation of credit plan targets among various financial institutions.
ii) Monitoring the implementation of the credit plan,
iii) Serving as a forum for discussing the development needs of the district.
State Level Bankers Committee
It functions as a clearing house for the issues emerging from the discussions of the
DCCs. RBI is closely associated with the state Level Bankers Committee.
National Bank for Agriculture and Rural Development (NABARD)
NABARD is conceived as an exercise of decentralization of the RBIs functions
relating rural credit and that it would take over the ARDC and the refinancing functions of
RBI in relation to state co-op. banks and RRBs.

Resources
The share capital of NABARD is held by RBI and GOI in equal proportion. The
NABARD draws funds from the RBI for its short-term operations, and for long-term
operations, it draws from the Government of India, floats bonds in the open market and also
draws from its National Agricultural credit (Long Term operations) Fund and National
Agricultural Credit (stabilization) Fund. The NABARD is also authorized to accept deposits
with maturity period of not less than twelve months from the central and state Governments,
local authorities, scheduled banks etc. and also to borrow foreign currency with the approval
of central government.
Management: The management of NABARD is vested with a 15 member Board of
management which consists of a chairman, a managing Director and 13 Executive Directors.
The chairman is the ex-officio Deputy Governor of RBI. The managing Director is the Chief
Executive of the Bank with operational responsibility for the performance of various tasks.
The Executive Director will be in charge of each of the major functional divisions. The Board
of Directors can constitute an Advisory Council.
Functions of NABARD
 Financial functions
 Refinance
 Direct Finance

 Developmental functions
 Supervisory functions
Ex.No:8 Estimation of Credit Requirement of Farm Business
– A Case Study
Dt:

Introduction
Credit is the most critical input for a farmer as without it no other input can be
purchased and no technology can be adopted. A farmer is provided with two types of credit
viz., the credit given by an input dealer in the form of agricultural inputs like fertilizers,
pesticides etc. for which the farmer would pay later upon harvest without any interest rate.
On the contrary, the farmer also receives credit from formal institutions like bank which the
farmer has to repay with accrued interest at a later time-period as stipulated by the lending
institution.
The credit that is lent to the farmer by the bank serves the twin purposes of
production and investment. Depending upon the purpose of the farmer, the time period for
loan repayment is also decided by the bank.
Short-term loan:
Crop loan is a short-term credit and is generally obtained from a primary credit co-
operative society of the village of from a nearby commercial bank. Loan amount is usually
sanctioned to the extent of one-third of the gross value of the agricultural produce. Total
cost of cultivation of the farmer is considered while granting loan. Money will be repaid by
the farmer after harvest of the crop. These loans are of self-liquidating type since the loan
will be repaid from the returns generated from the same loan itself.
Long-Term Loan:
Long-term loan is usually called as investment loan investment in agriculture is of two
types viz., (1) The first type involves operating investment which includes the requirement of
seed, plant nutrients, plant protection chemicals and wage payments and the second type is
concerned with long-term investment in capital assets such as land, machinery etc. The first
type of investment gets covered under crop loan as the amount required will be limited (Say.
Rs.40,000 per ha).
The second type of investment involves time value of money as the loan amount will
be repaid only after a few years due to the large amount of finance involved (say, Rs.4 lakh).
The repayment is not possible within one production cycle or two since the returns are
spread over different time periods. Long term fall under this second type of investment and
they involve the time value of money.
Estimation of credit requirement
The different methods of estimation of credit are given as follows:
(i) Gross value approach

The farm credit is determined by the one-third gross value of the farm produce.
Gross value is the product of yield and price of both the main-product and by-product of
a crop. For instance, the gross value of groundnut crop is given as below:
 Table 8.1: Gross value per ha of groundnut produced by a farmer at Villupuram
District
Sl. Item Quantity Price Value
No. (qtl/ha) (Rs./qtl (Rs./ha)
1. Yield of main product 22.50 4250 95625
2. Yield of by-product 12.50 750 11875
Gross value of the produce = 107,500
1/3rd of the gross value of the produce = 35,834

Thereby, the credit requirement of a groundnut farmer based at Villupuram district, Tamil
Nadu is estimated to be Rs.35,834 based on gross value approach.
(ii) Cost of cultivation approach

To work out credit requirement, the paid out costs (i.e. variable costs) which has to be
paid in cash during the production process are taken into consideration. The variable costs
are those which vary with the level of production and the cost of fixed capital (e.g. land or
tractor) will not vary with the production. Farmers need money for paying labour wages,
purchase of seeds, plant protection chemicals, plant nutrients etc. Credit need of the farmer
is, therefore, considered as the total of all the variable costs which can be called as Cost A.
The formula for the estimation of ‘Cost A’ is given by.
Cost A: It includes all actual expenses in cash incurred in production by the farmer.
(i) Value of hired human labour
(ii) Value of bullock labour (both hired and owned);
(iii) Value of machine power (both hired and owned);
(iv) Value of seeds (both owned and purchased);
(v) Value of insecticides, pesticides and weedicides;
(vi) Value of manures (both owned and purchased);
(vii) Value of fertilizers
(viii) Depreciation of implements and farm buildings
(ix) Irrigation charges
(x) Land revenue and other taxes
(xi) Miscellaneous expenses (electricity charges etc) and
(xii) Interest of working capital.

In reality, the non-cash payments are not at all accounted while estimating the credit
requirement. As farmers do not pay depreciation cost in cash, it is to be subtracted from
Cost A. Thereby, the credit requirement of a farmer is given by
Credit requirement = Cost A – Depreciation Cost.
Table 8.2: Estimate the credit requirement of a groundnut farmer per ha using cost of
cultivation approach
Sl.N Item Physical unit Value (Rs.) Working
o. capital
1. Farm Buildings (Rs.) 1 1.75 lakh -
2. Tractor (Rs.) 1 15 lakh -
3. Land vlue (Rs. / ha) 1 22 lakh -
4. Depreciation rate of 10% x 15 lakh = 15 lakh x 150,000
 tractor @ 12.50% 10%
5. Depreciation rate of farm 7.5% =1.75 lakh x 13,125
buildings 7.5%
6. Seed 100 kg @ Rs.65/ kg 6500 6500
7. Fertilizer 200 kg @ Rs.72/ kg 14,400 14,400
8. Manures – purchased 5 tonnes @ Rs.4000 per 20,000 20,000
(Rs./ha) tonne
9. Plant protection chemicals 4 litres @ Rs.800 per 3200 3200
(Rs./ha) litre
10. Human labour (Rs./ha) Rs.300/- 12,900 12,900
day for 43 man-days
11. Animal labour (Rs./ha) 4 bullock pair @ 1200 / 4800 4800
pair
12. Working capital 224,925
13. Interest on working capital (7%) 15,745
14. Total working capital (Cost A) 240,760
15. Depreciation amount 163,125
16. Credit requirement = Cost A – Depreciation 77,545

In this example, the credit requirement of a groundnut farmer comes out to be

Rs.77,545 for per ha.
(iii) Proportionate cost approach:
The credit requirement of a farmer can also be determined by the proportion of credit
requirement of an ith farmer for jth crop (Pij). As the proportion of credit requirement (Pi)
varies upon the farm size (Aij), the specification will be,
Credit requirement = Cost A X Pij X Aij
Type of Proportion Cost A Area Credit Requirement Credit
farmer (Pij) (Rs.) (Aij) estimation Required(Rs.)
= Cost A x Pij x Aij
Small 55% 240,760 1 = 240,760*0.55*1 132418
Medium 45% 240,760 3 = 240,760*0.45*3 325026
Large 35% 240,760 5 = 240,760*0.35*5 421330
Exercise 1
Estimate the credit requirement of a 1 ha groundnut farmer with the given data using (i)
Gross value approach. (ii)Cost of cultivation approach, and (iii) proportionate cost approach.
Specify appropriate formula as required.

Sl. No. Item Rs./ha

1. Farm Buildings (Rs.) 1.75 lakh
2. Tractor (Rs.) 12.5 lakh
3. Land value (Rs./ha) 22 lakh
4. Depreciation rate of tractor 12.50%
5. Depreciation rate of farm buildings 7.5%
6. Seed (Rs./ha) 6500
7. Fertilizer (Rs./ha) 7200
8. Manures – purchase (Rs./ha) 1250 / quintals for 5 tonnes
9. Plant protection chemicals (Rs./ha) 6800
10. Human labour (Rs./ha) Rs.300/- day for 43 man days
11. Animal labour (Rs./ha) 4 bullock pair @ 1200/- pair
12. Machine labour (Rs./ha) 12 hours @ 750/- hour
13. Irrigation charges (Rs.) Rs.300/- day for 6 man days
14. Rent paid for leased – in land (Rs./ha) 10% of the value of main product
15. Rental value of owned land (Rs./ha) 15% of value of main product
16. Family labour (Rs./ha) 32 man days
17. Electricity charges (Rs./ha) 2500
18. Land revenue (Rs. / ha) 60
19. Manures – owned (Rs. / ha) 3 tonnes
20. Interest on tractor’s value (Rs./ha) 14.5%
21. Interest on working capital (Rs./ha) 7%
22. Price of main-product (Rs./ha) Rs.1250 for 20 kg
23. Price of by-product (Rs./ha) Rs.16 per kg
24. Yield of main-product (Qtl/.ha) 18.25 qtl
25. Yield of by-product (qtl/.ha) 450 kg

Average: Acreage for small farmer is 1 ha; 2 ha medium farmer; and 5 ha large farmer.
Ex.No:9 PREPARATION AND ANALYSIS OF BALANCE SHEET
AND CASH FLOW STATEMENT- A CASE STUDY.
Dt:
Introduction
Financial statements usually consist of: 1. Balance Sheet 2. Profit & Loss statement,
and 3) Cash flow statement. They provide summarized information financial activities of
farmers in a systematic manner. These statements are useful to develop farm financial
plans, to know financial solvency and stability of farm business, useful to convince the
lenders about the long term and short term solvency of the business and for developing
financial ratios that can help in decision making The inter – relationships amount the three
financial statements can be presented as :
Balance sheet Balance sheet

Cash flow statement

Income statement

Time

Balance sheet or Net-worth statement:

A balance sheet or a net-worth statement is a financial tool used to understand farm
solvency or financial position of a farm. It shows what a farmer owns (assets) What he owes
(liabilities) and his equity. The components of a balance sheet are as follows.
Assets: The possessions of the farmer that have monetary value are called assets. These
items are usually listed on the left hand side of the balance sheet.
Liabilities : The amount of loans that the farmer owes to his creditors is called liabilities.
These include dues/loans/borrowings and outstanding credit of a farmer. Generally,
liabilities are located on the right side of the balance sheet.
Net-worth or Equity: This refers to the difference between total value of assets and the
total value of liabilities in a given time period. This is a balancing figure that a farmer
receives with whatever assets are left after fulfilling the liability claims. It can be given by
Owner’s equity = Assets – Liabilities. If total assets > total liabilities, then it is called as net-
worth and if total liabilities > total assets, then it is called as net deficit.
Liquidity: The capacity of a farmer to meet immediate financial obligations.
Solvency: It is the financial ability of the farmer to pay long-term loans.
Classification of assets and liabilities:
Assets can be classified into:
i) Current assets or short-term assets: The assets which are very liquid or which can
be converted into cash within a short time period (usually one year) are current
assets. E.g. cash on hand, agricultural produce ready for disposal (i.e. stocks of
paddy or pulses), agricultural inputs purchased, amount to be received from others,
saving deposits, time deposits (such as fixed or recurring deposit in a bank), gold etc.
 ii) Intermediate or working assets: Intermediate assets are those which are long liquid
than current assets as such assets would require relatively more time period to
convert into cash. For example, machinery, equipment, livestock, tractor etc.
iii) Long term assets or fixed assets: An asset that is permanent or which can be used
by the farmer for longer time period is called a long-term or fixed asset. Moreover
such assets take longer time or very difficult to convert into cash due to verification
procedures or legal restrictions E.g. Land, farm buildings, cattle shed etc.

Similarly, liabilities of a farmer can be classified into:

(i) Current (short-term) liabilities: Debts or loans that a farmer has to pay within
one year or in the near future. E.g. Crop loans, hand loans, installments paid for
medium term or long term loans. etc.
(ii)Intermediate liabilities: These loans are to be repaid within a period of two to five
years. For example, livestock loan or machinery loan etc.
(iii) Long-term liabilities: The loans for which the repayment period is more than
five years are long-term liabilities. E.g. Tractor loan, orchard loan, land
development loan.

Table 9.1: A model balance sheet or net-worth statement

Assets Amount Liabilities Amount
(in Rs.) (in Rs.)
Current assets Current Liabilities
Cash on hand 10,000 Crop loans to be repaid to 8,000
institutional agencies
Savings in Bank 8,000 Accounts payable 11,000
Value of grains ready 38,500 Hand loans 5,000
for disposal
Livestock products 60,000 Money owed to input 25,000
(eggs, birds etc.) suppliers
Fruits vegetables 8,000 Annual installments of MT 19,000
fodder, and feed ready and LT loans
for sale
Value of bonds and 2,000
shares to be realized in
the same year.
Sub-Total 1,26,500 Sub-Total 68,000

Intermediate assets Intermediate Liabilities

Dairy cattle 10,000 Livestock loan 8,000
(outstanding amount)
Bullocks 9,000 Machinery loan 15,000
(outstanding amount)
Poultry birds 15,000 Unsecured loan 10,000
(outstanding amount)
Machinery and 15,000
equipment
Tractor 1,75,000
 Sub-Total 2,24,000 Sub-Total 33,000
Long term assets Long-term liabilities
Land 6,00,000 Tractor loan (outstanding 1,20,000
amount)
Farm Buildings 25,000 Orchard loan 25,000
(Outstanding amount)
Unsecured loans 10,000
(land development)
Sub-total 6,25,000 Sub-total 1,55,000
Total of assets 9,75,500 Total of liabilities 2,56,000
Networth or equity
Total of liabilities + 7,19,500
networth 9,75,500
Source: Subba Reddy et al. (2016)
Estimation of Test ratios:
Total current assets
1. Current Ratio = -----------------------------
Total current liabilities

1,26,500
= ------------- = 1.86
68,000
Total current assets + Total intermediate assets
2. Intermediate Ratio = ----------------------------------------------------------------- or
working Ratio Total current liabilities + Total intermediate
liabilities
1,26,500 + 2,24,000 3,50,500
= ---------------------------- = ------------- = 3.47
68,000 + 33,000 1,01,000

Total Assets 9,75,500

3. Net Capital Ratio = ------------------ = ------------- = 3.81
Total liabilities 2,56,000

Cash flow statement

A cash flow statement is a summary of cash inflows and cash outflows of a
farmer or farm business in a particular time period. Cash inflow will refer to the money
coming to the farmer’s account i.e. credit (e.g. loan, gross returns from selling a farm
produce, income from other sources) and cash – outflow refers to the money going out of a
farmer’s account i.e. debit (e.g. loan interest purchase of farm inputs). It is one of the most
important financial statements for a farmer or a farm business. It is a listing of the flows of
cash into and out of farm business. It represents the liquidity of a farmer. A projection of
future flows of cash is called a cash flow budget. Working capital is an important part of a
cash flowl analysis. it is defined as the amount of money needed to run every day business
operations and transactions, and is calculated as current assets (which the farmer owns)
less current liabilities (which the farmer owes to others)
Cash Flow is not profitability
A cash flow statement will not show the profitability of any business or project.
Although closely related, cash flow and profitability are different. A cash flow statement lists
cash inflows and cash outflows while the income statement lists income and expenses. For
a farmer even a loan amount or pension amount is a cash inflow. But the returns coming
from farming can also be called as income. Thereby, a cash flow statement shows liquidity
while an income statement shows profitability. Many income items are also cash inflows.
The sales of crops and livestock are usually both income and cash inflows.
However, there are many cash items that are not income and expense items and
vice versa. For example, the purchase of a tractor is a cash out flow if the cash is paid at the
time of purchase. If money is borrowed from a bank for the purchase of tractor, the down
payment is a cash outflow at the time of purchase and the annual principal and interest
payments are cash outflows each year.
Advantages of a cash flow statement
1. It helps in estimating the total credit needs and expenditure of a farmer;
2. It helps in projecting sources and applications of funds for the upcoming season.
3. It helps in identifying cash deficit periods in advance for taking corrective actions.
4. It helps in planning the repayment schedule of the farm loans obtained; and
5. It helps the banks for revising scale of finance and rescheduling loans.

Components of a cash flow statement

It consists of: (1) Cash receipts (ii) Cash expenses and (iii) Cash balance
1) Cash receipts
(i) Previous cash balance: This is the surplus amount of the previous year or season
of the farmer which is carried forward.
(ii) Total operating sales: These are the returns obtained from the sale of farm
products and livestock products.
iii) Total capital sales: These refer to the sale of any capital item (e.g. gir cow, tractor)
that the farmer carries out within the assessment period.
(iv) Non-farm incomes: These refer to the income added by the family members of a farmer
carries out within the assessment period.
v) Non-farm incomes: These refer to the income added by the family members of a farmer
by their earnings from other occupations. E.g. A son or daughter working in an IT firm at
Bengaluru sending money to the farmer based at Villupuram.
vi)Borrowings: These refer to the institutional or non-institutional loans obtained by a farmer
for farm operations or family expenses.

II) Cash expenses

i) Operating expenses: These are the expenditure incurred on kharif and rabi crops
as well as the expenditure on other allied farm activities.
ii) Capital investment: If refers to the purchase of fixed capital item by the farm such
as the purchase of land, cattle, construction of farm building or cattle shed etc.
iii) Family expenditure: It refers to the farmer’s expenditure towards food, clothing,
shelter, medical, education, recreation and other items.
iv) Payment of previous period’s loan: It refers to the settlement of a loan obtained
by a farmer in the previous period.
 v) Payment of installments of long-term loans: It refers to the repayment of loan
interest or installments by the farmers towards clearing off the medium term or
long term loans obtained.

III. Cash balance:

It is the sum of amount remaining which is obtained by the difference between cash
receipts and cash expenses. It refers to the cash balance of the current period which will
be carried forward to the next period.

Exercise 1: Prepare a balance sheet as on 31.03.2018 of a farm using the following

information and test the liquidity and solvency status of the farm.
Balance of sheep loan Rs. 7,000, bank balance Rs. 30,000, Cash on hand Rs. 300, Value
of Milch Animal Rs. 5,000, Amount receivables Rs.800, Intercrop Black gram for sale
Rs.5,000, Bullock pairs Rs. 6,000, Crops & Supplies in store Rs. 3,000, wet land (1/2 ac)
Rs.15,000, Oil engine Rs. 7,000, Value of Bullock cart Rs.4,000, Dry land 5 Ac Rs.80,000,
Garden land 3 Ac Rs 60,000, Mango garden Rs.25,000, Operating loan payment Rs10,000,
Forthcoming principal due on long term loan Rs. 3,000 and Mortgage of land Rs.25,000.

Exercise 2: Classify the assets and liabilities as on 31.10.2019 in the given problem and
prepare a balance sheet. Comment on the net worth of the business.
The Farmer has 13.50 acres of land of which, 10 acres are dry land that has a market value
of Rs.8, 000/ac, 3 acres are garden land whose value is Rs.40, 000 and 0.50 acres of
wetland worth Rs.40,000. He has mortgaged land worth of Rs.40,000 with the Land
Development Bank. He has established a mango garden in 1.00 acre ten years back. It is
worth Rs.20,000. He has standing crops and other inputs stored to the value of Rs.30,000.
He has in his store, cotton worth of Rs.5,000 meant for sale. The farmer has a bullock cart
valued at Rs.7,000 and a pair of bullock worth Rs.10,000. He has purchased the bullocks
on loan and the balance to be paid is Rs.7,000. He has a milch animal for home
consumption worth of Rs.4,500. The Farm has an oil engine worth of Rs.7,000. The farmer
has to repay (principle and interest) Rs.15,000 on the crop loan and Rs.4,000 in long term
loan. He has a bank balance of Rs.2,500 , cash Rs.1,500 and accounts receivable of
Rs.1,500.
Exercise: 3
From the given table, work out the total cash income, total cash expenses, net cash farm
income, total capital sales, net capital flow, total other income, total other expenditure, net
other income less expenditure, net cash farm income, net capital expenditure, net income,
net other income, cash surplus and closing bank balance for all the four quarter's and for the
whole year.
Quarterly Cash flow summary for the period from
July,2018 – June 31,2019
I II III IV Yearly
Quarter Quarter Quarter Quarter Total
Sl.
Particulars July’16- Oct’16 - Jan2017- Apr2017- July 2016 -
No. Sep’16 Dec’16 Mar2017 Jun2017 June 2017

Section : Net cash farm Income

A. Cash Income
1. Crops
a. Paddy 7,500 --- 10,500 ---
b. Groundnut 6,000 6,000 --- ---
c. Sugarcane 2,500 3,000 20,000 ---
2. Broiler sales 5,000 5,500 --- ---
3. Milk sales 1,150 400 1,250 1,000
4. Total cash income
B. Cash expenses
5. Hired labour 800 300 900 1,000
6. Hired bullock labour 700 1,000 2,000 1,300
Machinery:
7. 500 200 800 1,000
Fuel and repairs
8. Fertilizers 90 30 180 200
Other crop expenses (seed plant
9. 550 50400 400
protection measures)
Livestock, machinery, veterinary
10. 250 250 150 350
and marketing expenses
11. Land rent 1,000 1,500 500
12. Interest on current debts,
800 800
intermediate and long term debts
13. Other miscellaneous expenses 200 450 50 50
14. Land revenue, cess, surcharge
-- 500 --- ---
and water tax
15. Attached farm servant wages 500 100 200 200
16. Total cash expenses
C. Net cash farm income
Section : II Net Capital Flow
D. Capital Sales
17. Milch animals -- 4,150 4,000 ---
---
18. Machinery sales --- 150 ---
19. Total capital sales
E. Capital Expenditure
20. Improvement repair 1,000 3,200 --- -- 4,200
21. Capital expenditure
F. Net capital flow (19-21)
Section : III Net other income flow
G. Other income
22. Off farm income --- 1,000 500 --
22.a Non-Farm income 5,000 5,000 5,000 5,000
23. Total other income --- ---
H. Other expenditure
24. Family living expenses 6,000 2,500 3,250 3,000
Principal payment to intermediate
25. 2,000 3,000 --- ---
and long term loans
26. Total other expenditure
I. Net other income (23-26)
27. Opening Bank Balance 800
28. Cash on hand 2000 8560 14,880 12,200
29 Net cash farm income (C)
30 Net Capital Flow (F)
31 Net other income (I)
Closing Bank Balance
32.
(27+28+29+30+31)
Cash Surplus/Deficit (Write
33. whether it is cash surplus or
deficit)
Ex.No:10 PREPARATION AND ANALYSIS OF INCOME
STATEMENT- A CASE STUDY
Dt:

Income Statement
The income statement or profit and loss statement is an important financial record
that measures financial progress and profitability of business over time. The income
statement is a summary of both the cash and non-cash financial transactions of the farm
business, which occurred during the selected accounting period. This document is important
because it is extensively used in analyzing the profitability, efficiency and financial stability of
the business. Information from this document is also used in the preparation of cash flow
summary.
The income statement is divided into two major sections namely income and
expenses.
Income
(i) Cash Receipts
The accounts indicate only the sales of those items for which the manager has
actually received payment.
( ii) Capital sales of the business
The sale of milch animal and equipments are major items. These types of receipts
are separated from normal cash receipts. The amount reported should reflect only the
actual net gain from capital sale. Net gain from milch animals that was raised on the farm
would be defined as the sale value. However for the purchased milch animal the net gain
would be defined as the difference between the sale price and current book value.
(iii)Change in inventory value of items produced on the farm.
The adjustments that are made in this part of the income statement are necessary
for a true indication of the farm’s income. All the income items included influence the
amount of cash flowing into the business. One of the management functions of the farms is
choosing the best time to market and the quantity of items in the inventory vary with the
marketing strategies chosen. The adjustments made in this part of the income statement will
give a more accurate picture of the farm’s income.
B. Expenses
The other major section of the income statement relates to the expenses of the
business. The expenses section is divided into two subsections.
(i) Operating expenses are cash expenses which generally vary with size of the business
operation.
(ii) Fixed expenses do not vary significantly with a change in the volume of business done
under the period of reporting.
The sum of operating and fixed expenses is the total expenses of the business. This
figure when subtracted from gross farm income gives the net farm profit. This gives an
indication of business profitability during the accounting period.
 Table 10.1: A model income statement or profit – loss statement
Receipts Amount Expenses Amount
I. Cash Receipts I. Operating Expenses
1. Paddy sales 7,500 1. Hired labour 3,000
2. Sugarcane sales 5,500 2. Hired bullock labour 4,000
3. Groundnut sales 12,000 3. Fuel and repairs for 2,500
machinery
4. Milk sales 6,500 4. Fertilizers 1,500
5. Broiler sales 12,000 5. Other crop expenses 2,400
(seed and spray of
chemicals
6. Miscellaneous income 6. Livestock and 1,000
(hired out human and 1,500 veterinary expenses
bullock labour)
7.Interest on current debt 600
Sub Total 45,000 8. Other miscellaneous 700
expenses
Sub Total 15,700
II. Net Capital Gain Income II. Fixed Expenses
1. Sale of purchased 2,000 1. Land rent 3,000
milch animal
2. Sale of farm bred 2,000 2. Land revenue, cess 800
animal and
surcharge water
charge
etc.
3. Sale of machinery 2,000 3. Land development 4,200
Sub Total 6,000 4. Interest on 1,000
intermediate
and long term loan
5. Equipment 1,500
depreciation
III. Change in Inventory Value 6. Livestock inventory 1,000
change
1. Crop inventory 4,000 7. Imputed value of 1,000
family
labour
2. Livestock inventory 1,000 8. Building inventory 600
change
Sub-Total 5,000 9. Imputed value of 1,500
operator’s
management

Gross Farm Income 56,000 Sub-Total 14,600

Net Farm Income 25,700
Total Expenses 30,300
Exercise: I
Prepare an income statement for the period from 1st October 2018 to 31st March 2019 of
farm using the following information and test the profitability of the farm.
Expenses on hired labour Rs 3000. Hired bullock labour Rs 4000 Fuel and other expenses
for machineries Rs 2500. Land rent Rs.3000, land tax, cess and surcharge , water charge
etc Rs. 800, Land development expenses Rs 4200, Fertilizer expenses Rs 1500, other crop
expenses Rs 2400, livestock and veterinary expenses Rs.1000, interest on current debt
Rs.600, Other miscellaneous expenses Rs 700, Interest on intermediate and long term loan
Rs 1000, Equipment depreciation Rs 1500, Imputed value of family labour Rs 1000,
Building depreciation Rs.600, Paddy sales Rs.7500, sugarcane sales Rs.5500, teak thinning
materials sale Rs12000, milk sales Rs 6500, broiler sales Rs 12000, miscellaneous income
Rs 1500, Sale of purchased milch animal Rs.2000, Sale of farm bred animal Rs 2000, sale
of machinery Rs.2000, crop inventory Rs 4000 and Livestock inventory Rs 1000.

Exercise: 2
Prepare a profit loss statement for the period from 1st July 2018 to 30th September 2019
using the following information.
Mr. Ramalingam owns 6 acres of agricultural land. He had cultivated paddy,
sugarcane and Casuarina during the year. He had sold 30 quintals of paddy @ Rs.1600
per quintal, 16 tonnes of sugarcane @ Rs.1735 per tonne, and 20 quintals of groundnut @
Rs.3,000 /qtl. He has 2 milch animals and a pair of draught animal. He has taken up a
small broiler enterprise with 200 birds. The milk sale fetched him Rs.10,000 during the
year. He sold the birds at the rate of Rs.60 per bird. He hires out the draught animal and
earns Rs.3,000 . He sells out a milch animal for Rs.7,000 and another home bred animal
for Rs.3,000. He disposes the old implements available in his farm for Rs.500. He has
stored 16.67 quintals of paddy produced during the last year. He incurs a loss of Rs.2,000
in selling the milch animal.
His expenses are as follows:
Land tax, cess - Rs.5,000
Attached farm servants - Rs.2,000
Hired labour - Rs.6,000
Hired bullock labour - Rs.4,500
Water charges - Rs. 600
Maintenance of machinery - Rs.4,000
Equipment depreciation - Rs.1,500
Fertilizer purchased - Rs.2,000
Irrigation structure repairs - Rs.4,500
Marketing expenses - Rs.1,800
Interest on current debts - Rs.1,200
Depreciation on buildings and
Implements - Rs. 850
Other miscellaneous expenses - Rs.1,600
Interest on intermediate and
Long term loans - Rs.1,000
Livestock inventory - Rs.1,000
Workout the total cash receipts, total net capital gain, changes in inventory value,
gross farm income, operating expenses, fixed expenses, total expenses and net farm
income and prepare income statement and offer your comments.
Ex.No:11 EXERCISE ON FINANCIAL RATIO ANALYSIS,
APPRAISAL OF FARM CREDIT PROPOSALS - A CASE
STUDY
Dt:

The balance sheet, income statement, cash flow statement supply a great deal of
information on the financial structure and progress of the farm business. These records are
helpful in assisting the farmer in decision making. The records must be analyzed to
ascertain the strengths and weaknesses of the business.

There are three types of financial tests and they are a) tests of liquidity, b) tests of solvency
and c) tests of profitability.

A. TESTS OF LIQUIDITY
Tests of liquidity are usually conducted to determine the firm’s ability to meet its current
financial obligations. The current ratio is the most commonly recognized indicator of a firm’s
liquidity.
1) Current Ratio
Current assets 39,100
Current ratio = ---------------------- = -------------- = 2.17
Current liabilities 18,000

Nature of current assets determines the value whether the firm is able to meet promptly the
current liabilities. The reasonableness of any current ratio can be tested by comparing
current ratios of similar firm in the industry.

2) Acid Test Ratio (ATR) or Quick Current Ratio

Current monetary assets 31,100

ATR = ----------------------------------- = ------------- = 1.73
Current liabilities 18,000

The difference between current ratio and acid test ratio is the elimination of inventories in
current assets used in acid test ratio. If a firm’s cash marketable securities and accounts
receivable are more than sufficient to meet its current liabilities, then inventories may be
viewed as a buffer to absorb any subsequent deficiency in the receivables, such as
unexpected bad debt.
3) The Inventory to Receivable Ratio

Inventory 8,000
----------------------- = ----------- = 10.00
Total receivables 800
It also associated with the acid test ratio. Inventory represents cost items while receivables
presumably include profit. Hence, a favourable change in this ratio may be due to the
execution of profitability convert its inventory into liquid cash. It also has relevance in
identifying a firm’s current position in a business cycle since inventory generally is more
subject to the value changes than the receivables are.
4) Intermediate Ratio

Total current assets + Total intermediate assets

Intermediate ratio (IR) =
Total current liabilities + Total intermediate liabilities

A farm with CR and IR less than 1 may be facing serious financial problems.

B)TESTS OF SOLVENCY
Tests of solvency are designed to measure a firm’s ability to meet both interest change and
repayment of loans associated with its long-term financial commitments. Tests of solvency
tell the manager how well his firm will survive a crisis but will provide little information as to
the firm’s normal operational viability.

1) Net Worth to Total Debt Ratio

Net worth 1,89,100
----------------- = --------------- = 0.79
Total liability 2,39,100

In general, the larger the net worth to total debt ratio, the less a firm’s creditors concern
themselves with thoughts of fore closure. It should be noted that some business may attempt
to improve their current ratio, though not necessarily their financial health, though a simple
funding operation. They decrease their current obligations by increasing long term debt and
leave total debt used by the manager as a valuable supplement to the current ratio. Where a
very large proportion of a firm’s total debt is funded, a manager may choose to use an
auxiliary ratio of net worth to current liabilities, there by emphasizing the relative size of
funded debt and its effect on solvency.

2) Net Worth to Fixed Asset Ratio

Net worth 1,89,100

----------------- = -------- --------- = 1.05
Fixed assets 1,80,000

This ratio indicates the proportion to the owner’s equity invested in fixed assets. The ratio of
above one, if it exists, represents the proportion of owner’s equity involved in the firm’s
working capital. A raising net worth to fixed asset ratio indicates that management may be
less concerned with insolvency. A declining ratio serves to warn management that the firm
possibly may be expanding its physical plant beyond its current ability to support it
financially. This would be particularly important to management during a general period of
declining business.

Total assets
3. Net capital ratio(NCR) =
Total liabilities
 Total liabilities
4. Debt - equity ratio =
Net worth

Net worth
5. Equity - value ratio =
Total assets

The net capital ratio, debt-equity ratio and equity-value ratio are indicators of long
term solvency of the business. These ratios indicate a manager's willing ess to use
borrowed capital in the operation of his business.
If the net capital ratio works out to less than one, the farm is using more of borrowed
funds. e.g. for the farm that has relatively stable expense and income situations, such as
dairy farm, lending institutions may be willing to advance credit even with NCR as low as
1.0. In other business such as orchards where income and expense fluctuate greatly from
year to year financial institutions might consider a NCR of 2 or 3 as a more appropriate
value, for advancing loans.
Again direction of movement of these ratios through time is more important.
i. NCR should be increasing over time.
ii. Debt equity ratio should be decreasing over time.
Equity ratio approaching, would be making progress towards higher solvency levels.

Lower the debt, the higher degree of protection enjoyed by the creditors. The lower this ratio,
the more desirable it is. It is also known as Debt to Net Worth ratio. The net worth indicates
the solvency of the business. But this is the ultimate solvency rather than intermediate
solvency. Ultimate solvency is meant that total resources are equal to or greater than total
liability, in case the entire business is closed out and all the liabilities are met with. Net worth
is greater than zero, when business is solvent. When total liabilities are not covered by total
resources, the business is insolvent or bankrupt. The intermediate solvency is meant the
relationship between current liabilities and liquid assets, which can be used to clear them off,
if demanded.
C) TESTS OF PROFITABILITY
Two subgroups of financial ratios are generally used by management to test the profitability
of a business. The first sub-group involves those ratios that measure profitability of a
business. The first sub-group involves those ratios that measure profitability as related to
investment. The second is more concerned with measuring profitability as related to sales.
Both sub-groups of ratios are helpful to managers in identifying performance trends over
time and/ or comparing profit performance among similar business firms.

1)The Earnings to Investment Ratio

Net income Rs.8,00,000

--------------- = ---------------- = 0.1 (Hypothetical figure)
Net worth Rs. 80,00,000

This ratio is investor oriented and is of particular interest to the stock holders in so far as it
has a direct impact on dividends.
2) The Earnings to Sales Ratio

Net income Rs.8,00,000

---------------- = ----------------- = 0.89 (Hypothetical figure)
Sales Rs.90,00,00

This ratio measures profit margin to sales. Higher the ratio, the more profitable the firm is.
However, in comparing two or more enterprises, extreme care should be taken that net
income excludes depreciation, taxes and outside earnings.

Income statement

Ratios calculated from the income statement give an indication of the relative
profitability of a business and the degree of flexibility the farm has in meeting the expenses.
The operating ratio indicates the proportion of the gross income to operating
expenses.

Total operating expenses

3. Operating ratio =
Gross farm income
Fixed ratio indicates the proportion of gross income allocated to meeting the fixed expenses.

Total fixed expenses

4. Fixed ratio =
Gross farm income

The relationship between the fixed ratio and operating ratio is important. Farms with
relatively large fixed ratio and small operating ratio generally are more vulnerable to cash
flow (also called liquidity) problems.
Total expenses
5. Gross ratio (GR) =
Gross farm income

Gross ratio (GR) indicates the proportion of gross income needed to meet the total
expenses and is the sum of fixed and operating ratios. In examining the three ratios the
gross ratio is the important among the three
If GR > 1 the business is not covering the total expenses of operation.
GR < 1 the farm is generating a positive net farm income.

Balance sheet and Income statement analysis

The primary ratio calculated using both the balance sheet/net worth statement and
the income statement is the Capital Turn Over Ratio. This ratio compares the use of
invested capital in business in relationship to the income generated. Higher the ratio, the
more efficient is the business. For a business with low capital turnover ratio to remain
competitive, it needs a high level of profit per rupee of income generated.
 Gross farm income + major purchase
Capital Turn Over Ratio =
Average Capital investment

Total Assets Turn-Over Ratio = Net Sales/ Total Assets

Net Income to Total Assets Ratio = Net Income / Total Assets

Exercise: Do the tests of liquidity, solvency, and profitability tests for balance sheet and
income statement prepared in the previous exercises.
Ex.No:12 Undiscounted Methods and Discounted Methods
Dt:

Undiscounted Method
Here, the cash flows of the investment are not discounted to estimate the present worth
of future stream of cash flow. There are four major methods in undiscounted measures as
discussed below
Ranking by Inspection: We can tell that by simply looking at the investment cost and
stream of net value of incremental production that one project should be accepted over
another.
Payback period: Payback period is the length of time from the beginning of the project until
the net value of the incremental production stream reaches the total amount of the capital
investment. The weakness of the payback period as a measure of investment worth is that it
fails to consider earnings after the payback period and it does not take into consideration the
timing of proceeds.
Proceeds per Unit of Outlay: The total net value of incremental production is divided by the
total amount of the investment. Again, the criterion of proceeds per unit of outlay fails to
consider timing; money to be received in the future weights as heavily as money in hand
today.
Average Annual Proceeds per Unit of Outlay: The total of the net value of incremental
production is first divided by the number of years it will be realized and then this average of
the annual proceeds is divided by the original outlay for capital items. By failing to take into
consideration the length of time of the benefits stream, it automatically introduces a serious
bias toward short-lived investments with high cash proceeds.
All these four measures fail to take into account adequately the timing of the benefit stream.
Therefore, undiscounted techniques have lesser applications in project evaluation.

DISCOUNTED METHODS
Concept Time Value of Money: Interest rate serves as the pricing mechanism for the time
value of money. The rate of interest is considered as an exchange price between the
present and future rupees. Thus rupee 1 today exchanges for (1 + i) rupees at the end of
period one in future. Or alternatively a Rupee 1 payment made one period in the future
exchanges for 1/1 + i rupees now.

Compounding is the process of finding future value of present amount.

Future value = PV x (1 + interest rate per conversion period) no. of conversion periods

Vn = V0 (1+i) n
PV = Present Value
n
(1+i) =is the compounding factor (interest rate)

The term (1+i)n can always be computed. However, the procedure becomes tedious
for higher values of n. Fortunately, numerical results of such equations have been tabulated
for widely ranging value of i and n.
 Discounting is the process of finding the present value of future account.

Future amount
Present value =
(1 + interest rate) no of conversion periods
Vn
VO = = Vn (1+i)-n
(1+i)n
i = Discount rate

The effects of time and interest on present and future values:

The important variables determining present and future values of payments are:
1) The number of conversion periods and
2) The size of interest rate per compounding period.

Discounted measures
In undiscounted measures of investment analysis, the time value of money is ignored
but which is very important in ranking and choosing the alternate investments. In discounted
measures of investment analysis the time value of money is taken care of.
1) Net Present Worth or Value (NPV or NPW)
2) Benefit Cost Ratio (BCR)
3) Internal Rate of Return (IRR)
Discounting Factor
In calculation of net present worth or benefit cost ratio, discounting factor must be
chosen prior to investment analysis. Usually the discounting factor used is the opportunity
cost of capital. The bank rate given on long term deposit (12%) is chosen as the discount
factor. The farmer instead of investing in the proposed investment can deposit in a bank and
earn 12% of interest i.e. the proposed investment should earn more than bank interest rate.
Net Present Worth (NPW)
This is simply the present worth of incremental net benefit or incremental cash flow
stream. It is interpreted as the present worth of the income stream generated by an
investment.

NPW  t 1 Bt / 1  r   t 1 Ct / 1  r 
n t n t

Bt = Benefit in year ‘t’ and Ct = Cost in year ‘t’

Selection criterion
Accept all independent projects with a zero or greater net present worth when
discounted at opportunity cost of capital. Ranking of acceptable alternate independent
project is not possible with net present worth criterion because it is an absolute and not a
relative measure. It is also the preferred selection criterion to choose among mutually
exclusive projects.
Benefit Cost Ratio (BCR)
This is the ratio of present worth of benefit stream to present worth of cost stream.

 B / 1  r 
n t

BCR  t 1 t

 C / 1  r 
n t
t 1 t
Selection criterion: Accept all independent projects with a benefit cost ratio of 1 or greater
when the cost and benefit streams are discounted at opportunity cost of capital.

Internal Rate of Return

In NPW and BC ratio, market rate of interest is chosen. It differs from place to place.
Internal rate of return is that discount rate that makes the net present worth of
incremental net benefit equal to zero. In other words it is the maximum interest that an
investment could pay for the resources used.

Selection criterion: Accept all independent projects having an internal rate of return equal
to or greater than the opportunity cost of capital.

t 1 Bt /1  r   t 1Ct /1  r   o

n t n t

Present worth of incremental net benefit

stream (cash flow) at lower discount rate
IRR = LDR + Difference between the two X
discount rates Absolute difference between the present
worth of cash flow at two discount
rates(Signs ignored)

IRR = Internal rate of return

LDR = Lower discount rate
Exercise 1: Find out feasibility of the above projects based on undiscounted measures

Four Hypothetical Pump Irrigation Projects

Year Incremental cost Value of Net value
Capital Operation Production Gross incremental of
Items and cost production incremental
maintenance (Gross production*
benefit)
Project I
1 30000 - - 30000 -
2 - 2000 3000 5000 20000 15000
3 - 2000 3000 5000 20000 15000
4 - - - - -
Total 30000 4000 6000 40000 40000 30000
Project II
1 30000 - - 30000 -
2 - 2000 3000 5000 20000 15000
3 - 2000 3000 5000 20000 15000
4 - 2000 3000 5000 9100 4100
Total 30000 6000 9000 45000 49100 34100
Project III
1 30000 - - 30000 -
2 - 2000 3000 5000 7000 2000
3 - 2000 3000 5000 19000 14000
4 - 2000 3000 5000 31000 26000
Total 30000 6000 9000 45000 57000 42000
Project IV
1 30000 - - 30000 -
2 - 2000 3000 5000 7000 2000
3 - 2000 3000 5000 31000 26000
4 - 2000 3000 5000 19000 14000
Total 30000 6000 9000 45000 57000 42000
* The net value of incremental production is the value of incremental production less the
operation and maintenance cost and the production cost.

Exercise 2 :
The gross returns and expenses incurred in cultivation of rain fed oil palm in one
hectare is furnished below. Work out the NPW, BCR and IRR for the project, given the
opportunity cost of capital as 16 per cent. Comment on the investment worthiness of the
project.
 Gross benefit and expenses from rainfed oil Palm Cultivation (Rs./ha)
Year Gross Benefit (GB) Gross Expenses
(GE)
1 0 7307
2 0 2313
3 0 2768
4 1305 3192
5 2610 4040
6 7830 4040
7 15660 4540
8 13490 5540
9 21320 6540
10 29150 7540

Exercise 3 :
The gross returns and expenses incurred in cultivation of Leuceana in one hectare is
furnished below. Work out the NPW, BCR and IRR for the project, given the opportunity
cost of capital as 16 per cent. Comment on the investment worthiness of the project.

Year Cost Benefit

0 50000 0
1 14200 26300
2 14200 26300
3 14200 26300
4 14200 26300
5 14200 26300
6 14200 26300
7 14200 26300
8 14200 36300
9 14200 36300
10 14200 42300

Exercise 4 :
A farmer wants to purchase a power tiller at Rs. 60,000 (Year = 0). Every year, the cost of
maintenance and returns for the power tiller are estimated at Rs. 14,200 and Rs.28000
respectively. The life period of the power tiller is 10 years. Advise the farmer about the
financial worthiness of the purchase of power tiller using NPW, BCR and IRR (The
opportunity cost of capital is 16 % per annum).
Ex.No:13 Preparation of Repayment Plans
Dt:

Repayment Principles
To calculate the payment amount, all terms of the loan must be known: interest rate,
timing of payments (e.g., monthly, quarterly, annually), length of loan and amount of loan.
Borrowers should understand how loans are amortized, how to calculate payments and
remaining balances as of a particular date, and how to calculate the principal and interest
portions of the next payment. This information is valuable for planning purposes before an
investment is made, for tax management and planning purposes before the loan statement
is received, and for preparation of financial statements.

With calculators or computers, the calculations can be done easily and quickly. The
use of printed tables is still common, but they are less flexible because of the limited number
of interest rates and time periods for which the tables have been calculated. Regardless of
whether the tables or a calculator is used, work through an example to help apply the
concepts and formulas to a specific case.
Lenders Use Different Methods
Different lenders use different methods to calculate loan repayment schedules
depending on their needs, borrowers' needs, the institution's interest rate policy (fixed or
variable), the length of the loan, and the purpose of the borrowed money. Typically, home
mortgage loans, automobile and truck loans, and Consumer installment loans are amortized
using the equal total payment method.
Lenders often try to accommodate the needs of their borrowers and let the borrower
choose which loan payment method to use. A comparison of Tables 1 and 2 indicates
advantages and disadvantages of each plan. The equal principal payment plan incurs less
total interest over the life of the loan because the principal is repaid more rapidly. However, it
requires higher annual payments in the earlier years when money to repay the loan is
typically scarce. Furthermore, because the principal is repaid more rapidly, interest
deductions for tax purposes are slightly lower. Principal payments are not tax deductible,
and the choice of repayment plans has no effect on depreciation. The reason for the
difference in amounts of interest due in any time period is simple: Interest is calculated and
paid on the amount of money that has been loaned but not repaid. In other words, interest is
almost always calculated as a percentage of the unpaid or remaining balance:
I=ixR
Where:
I = interest payment
i = interest rate
R = unpaid balance.

Points to be considered
 Long-term loans can be repaid in a series of annual, semi-annual or monthly
payments.
 Payments can be equal total payments, equal principal payments or equal payments
with a balloon payment.
  The Farmer's Home Administration usually requires equal total payments for
intermediate and long-term loans.
 Use an amortization table to determine the annual payment when the amount of
money borrowed, the interest rate and the length of the loan are known.

Money borrowed for long-term capital investments usually is repaid in a series of annual,
semi-annual or monthly payments. There are several ways to calculate the amount of these
payments but the most popular are:
1. Equal total payments per time period (amortization);
2. Equal principal payments per time period; or
3. Equal payments over a specified time period with a balloon payment due at the end
to repay the balance.

When the equal total payment method is used, each payment includes the accrued
interest on the unpaid balance, plus some principal. The amount applied toward the principal
increases with each payment (Table 1). The equal principal payment plan also provides for
payment of accrued interest on the unpaid balance, plus an equal amount of the principal.
The total payment declines over time. As the remaining principal balance declines, the
amount of interest accrued also declines (Table 2). These two plans are the most common
methods used to compute loan payments on long-term investments. Lenders also may use a
balloon system. The balloon method often is used to reduce the size of periodic payments
and to shorten the total time over which the loan is repaid. To do this, a portion of the
principal will not be amortized (paid off in a series of payments) but will be due in a lump
sum at the end of the loan period. For many borrowers, this means the amount to be repaid
in the lump sum must be refinanced, which may be difficult.

Amortization Tables
An amortization table can determine the annual payment when the amount of money
borrowed, the interest rate and the length of the loan are known. For example, an 8-year
loan of Rs.10,000 made at an annual rate of 12 percent would require a Rs.2,013 payment
each year.

Equal Total Payments

For equal total payment loans, calculate the total amount of the periodic payment
using the following formula:
B = (i x A) / [1 - (1 + i)-N]
where:
A = amount of loan,
B = periodic total payment, and
N = total number of periods in the loan.
The principal portion due in period n is: Cn = B x (1 + i)-(1 + N - n)
where:
C = principal portion due and
n = period under consideration.
The interest due in period n is: In = B - Cn.
The remaining principal balance due after period n is: Rn = (In / i) - Cn.
Equal Principal Payments
For equal principal payment loans, the principal portion of the total payment is
calculated as:
C = A / N.
The interest due in period n is: In = [A - C(n-1)] x i.
The remaining principal balance due after period n is: Rn = (In / i) - C.
Table 13.1: Example of loan amortization: equal total payment plan.
Loan amount Rs.10,000, annual rate 12%
8 annual payments
Year Annual payment Principal payment Interest Unpaid balance
Rs.10,000.00
1 2,013.03 813.03 1,200.00 9,186.87
2 2,013.03 910.59 1,102.44 8,276.38
3 2,013.03 1,019.86 993.17 7,256.52
4 2,013.03 1,142.25 870.78 6,114.27
5 2,013.03 1,279.32 733.71 4,834.95
6 2,013.03 1,432.83 580.20 3,402.12
7 2,013.03 1,604.77 408.26 1,797.35
8 2,013.03 1,797.35 215.68 0
Total Rs.16,104.24 Rs.10,000.00 Rs.6,104.24 0

Table 13.2: Example of loan amortization: equal principal plan.

Loan amount Rs.10,000, annual rate 12%
8 annual payments
Year Annual payment Principal payment Interest Unpaid balance
Rs.10,000.00
1 2,450.00 1,250.00 1,200.00 8,750.00
2 2,300.00 1,250.00 1,050.00 7,500.00
3 2,150.00 1,250.00 900.00 6,250.00
4 2,000.00 1,250.00 750.00 5,000.00
5 1,850.00 1,250.00 600.00 3,750.00
6 1,700.00 1,250.00 450.00 2,500.00
7 1,550.00 1,250.00 300.00 1,250.00
8 1,400.00 1,250.00 150.00 0
Total Rs.15,400.00 Rs.10,000.00 Rs.5,400.00 0
Exercise 1:
Work out repayment plan of long term loan using equal total payment method and equal
principal payment method. The loan amount is Rs.15000/- @ interest rate of 12% per
annum and the repayment period of 5 years.

Exercise 2:
Work out repayment plan of long term loan using equal total payment method and equal
principal payment method. The loan amount is Rs.50,000/- @ interest rate of 15% per
annum and the repayment period of 10 years.
Ex.No:14 PREPARATION OF BANKABLE PROJECTS/ FARM
CREDIT PROPOSALS AND APPRAISAL
Dt:

Introduction
After successive losses in traditionally grown crops, farmers are inclining towards
bee farming. In order to maximize agricultural production, honeybee can be used as an
important input agent. About 80 % crop plants are cross-pollinated, as they need to receive
pollen from other plants of the same species with the help of external agents. Farmers
planning for commercial honey bee farming should consider taking apiculture training.
Usually, a bee colony consists of a queen, several thousand workers and a few hundred
drones. Queen is a fertile and functional female where as a worker is a sterile female and
the drone is a male bee insect. Among honeybees, there is a division of labour and
specialization in the performance of various functions. Farmers can utilize honeybees for
their pollination services or to obtain products from them. The methods used depend on the
type of bees available, and the skills and resources available to the beekeeper.
Beekeeping with very low investment and skills has the potential to offer direct
employment opportunity to people specially to hill dwellers, tribals and farmers. Profitability
and sustainability of bee farming is very vital therefore may be taken-up in cluster mode by
the small farmers/marginal farmers, Farmers Producers Organisations (FPOs), members of
Joint Liability Groups (JLGs)/ Self Help Groups(SHGs) etc.
Beekeeping is an additional income generating activity and can be undertaken on
part time basis. In the present scenario when land holding of farmers is decreasing day by
day many people are rendered underemployed, bee keeping in the villages can be a boon
for such persons provided they are trained to start this activity. Economic model of bee
keeping considers the following parameters :
 Generation of additional employment opportunities.
 Additional income to the farmers with least working capital requirement..
 Enhance the yield of flowering crops by 15% to 20%.

2. Status of honey production in India

In India beneficial uses of honey bees has been recorded since ages. There are four
types of honey bees found in India viz; Apis florea (little bee), Apis cerena ( common bee),
Apis dorsata (rock bee) and Apis mellifera (European bees). Apis mellifera bees were
imported to India during late sixties in order to get higher yield of honey. At present,
approximately there are about five million bee colonies are in India which produces about
90000 tons of honey annually. India is one of the honey exporting countries. The major
market for honey are Germany, USA, UK, Japan, France Italy and Spain. Honey production
in India got momentum since 2005 primarily due to increased rearing of Apis mellifera. State
wise production honey production of honey in India is given in Table below.
Table 14.1 Honey Production in India(Production in 000 tonne)
Sr.No State 2017-18 2018-19
Uttar Pradesh 18.9 22.0
1 West Bengal 16.5 18.5
2 Punjab 15.5 16.5
3 Bihar 10.0 15.0
 4 Rajasthan 8.5 10.5
5 Himachal Pradesh 5.5 6.0
6 Haryana 4.5 4.8
7 Kerala 3.0 2.2
8 Jammu & Kashmir 2.1 2.2
9 Karnataka 2.1 2.2
10 Andhra Pradesh 1.9 1.9
11 Tamil Nadu 1.9 2.1
12 Maharashtra 1.7 1.7
13 Other States 1.5 0.3
Total 105.0 120.0
Source: Ministry of Agriculture and Farmers Welfare, Govt. of India

3. Requirements of honey bee farming :

The selected site should be dry without dampness. High relative humidity will affect
bee fight and ripening of nectar. Clean natural or artificial source of water should be
provided. Trees serve as wind belts in cool areas. Hives can be kept under shade of trees or
artificial structures should be constructed to provide shade. Plants that yield pollen and
nectar to bees are called bee pasturage and forage. Such plants should be plenty around
the apiary site.
Honey bee Farming Equipment:- Here are small tools and equipment used in most of
the commercial honey bee farming. However, find out with local beekeepers for appropriate
agriculture equipment needed. Thin & thick beekeeping brushes, stainless steel knives,
stainless steel & iron hive tools of L shaped & curved shaped, Food graded plastic made
queen cage, queen gate, hive gate, honey extractor, smoker, queen excluder, pollen trap,
propolis strip, royal jelly production & extraction kit, queen rearing kit, bee venom collector. A
list of bee equipment’s and bee hive suppliers are given in Annexure –I.
4. Crops suitable for bee keeping :
Vegetable crops such as Coriander, cucumber, cauliflower, carrot, melon, onion,
pumpkin, radish and turnip; oilseed crops; sunflower, mustard, niger, rape seed; forage seed
crops like lucerne, clover. These crops ensures supply of nectar to the bees for production of
honey in adequate quantities.
5. Increase in crop yield due to pollination :
Yield Increase due to bee pollination in honey bee farming has been noteworthy.
Incremental crop yields upto 44 % in mustard & sunflower, 32-45 % increase in cotton, 20 %
increase in lucerne, 90 % increase in onion and 45 % increase in apple yield have been
reported due to maintenance of beehives in their fields.
6. Management of bees for pollination in honey bee farming:
It is recommended to place hives very near the flied to save bee’s energy and
migrate colonies near the field at 10 % flowering. It is also recommended to place colonies at
3 per ha for Italian bee and 5 per ha for Indian bees. The colonies should have at least 5 to 6
frame strength of bees and with sealed brood and young mated queen. Should allow
sufficient space for pollen and honey storage.
7. Pests and diseases in honey bee farming:
Wax moths, ants, wasps, wax beetles, birds, tracheal mites, parasitic mite, bee mites
and brood mite are the common pests to honey bees. European foul-brood disease,
American foul brood, sac-brood disease (SBV),Thai sac brood virus (TSBV), chalk brood
disease and stone brood disease are the main diseases found in the honey bee farming. For
control of these pests and diseases, contact local Department of Agriculture.
8. Harvesting of Bee Products in Honey Bee Farming:
Honey, bees wax, royal jelly, bee venom, propolis and pollen are the main bee
products. Honey should be harvested at the end of a flowering season. Honey is extracted
only from super combs using honey extractor equipment. Since honey is collected by
honeybees from the essence of nectar of flowers, it has immense nutritional and medicinal
value. Due to presence of flexible nature of most concentrated sugar in honey it is easily
soluble in blood and provides instant energy to the body when consumed. Gum and wax are
the by-products which are used in manufacturing of high quality cosmetics, shoe polish,
treatment of animals etc.
9. Marketing of honey :
In the Indian market, it is estimated that size of both branded and unbranded
segments of honey, as per industry estimates, is approximately Rs 2,000 crore, with the
share of branded honey being approximately Rs 700-800 crore. The consumption pattern of
honey is not dependent on any season or age group. The branded honey market is growing
at a compound annual growth rate (CAGR) of 10 per cent, with a current market size of Rs
700 crore. India produces more than 88000 tons of honey, out of which about 50 per cent is
exported annually. Major destinations of export included USA, Saudi Arabia, UAE, Morrocco,
Bangladesh, Canada etc. KVIC and its stores all over India play major role for bulk
procurement of honey. Firms such as Dabur, Patanjali, Himalaya, Emami, Hindustan Uniliver
Ltd and Colgate-Palmolive etc have also procure apiary honey in India. Average farm gate
price of honey in Indian market varied between Rs 100 per kg and Rs 110 per kg during
2017-18. Govt.of India has now declared MSP @ Rs 150 per kg for honey procurement.
Honey mission has also been launched by KVIC and private firms playing vital role,
procurement price of honey is likely to increase further resulting additional income to
farmers.
10. Training institutes for bee keeping :
The following training institutions offer training on bee keeping :
 Lupin Welfare & Research Foundation, Krishna Nagar, Bharatpur Rajasthan.
 Bee Keeping and Research Institute, Agricultural University, Hisar Haryana.
 Jyoti Gramodhyog Sansthan, Gangoh, Saharanpur UP.
 Bee Keeping Training Center, Janmahadev Road, Khadi Gramodhyog Dehradun,
Uttarkhand.
 Bee Keeping Research and Traing Institute, Gramodhyog Ayog, Ganeshkhind Road,
Pune, Maharashtra.
 Bee Institutional Area, August Kranti Road, Hauz Khas, New Delhi.
11. Economics of scheme with 10 bee hives :
Unit cost, average cash flow and repayment schedule has been worked. The
economics have been worked out for a 10 bee boxes model. The economics relates to Apies
mellifera species of honey bee. The scheme has been found economically viable and details
of the same is given below.
 Table 14.2: Economics of 10 bee hives model
I. Unit Cost
A Fixed Cost Qty Amount (Rs)
1 Cost of 10 Boxes with Super Queen @ Rs 10 25000
2500
2 Cost of Frames @ Rs. 250 80 20000
3 Gloves, nets, drums, tray, knife, honey 5000
machine & other equipments
Sub- Total 50000
B Variable Cost
1 Sugar @ 2 kg per hives and @ Rs 35/ kg 700
2 Medicine @ Rs. 30 per hive 300
3 Cloth to cover boxes (@2 m per box and Rs 500
25 per m)
4 Transport for migration 6000
5 Honorarium to master bee keeper 5000
6 Other 1000
Sub Total 13500
Grand Total 63500

Unit cost (A+B)/ Total Cost Rs 63,500.00

Margin 10% Rs 6400.00
Bank Loan Rs 57,100.00

Table 14.3:Cash Flow Statement

Sl. Particulars I Year II Year III Year IV Year V Year VI
No Year
1 Honey collection per 10 30 35 40 40 40
hive (kg)
2 Wax produced per hive 0.3 0.3 0.3 0.3 0.3 0.3
(kg)
3 Income from sale of 10000 30000 35000 40000 40000 40000
honey @ Rs. 100 per
kg from 10 hives
4 Wax @ 400 per kg 12000 1200 1200 1200 1200 1200
from 10 hives
5 Sale of extra colony 0 5000 5000 5000 5000 5000
6 Gross Income 11200 36200 41200 46200 46200 46200
7 Recurring expenses -13500 - 13500 -13500 13500 -13500
(first year capitalized) 13500
8 Gross profit -2300 22700 27700 32700 32700 32700
9 Depreciation (@ 10% 8333 8333 8333 8333 8333 8333
SLM)
10 Interest @12% 0 13704 6612 5532 3852 1992
11 Net Income -10633 663 12755 18835 20515 22375
Table 14.3:. Repayment Schedule:
Year Loan O/S Interest Repayment Repayment Total Gross Loan
at @ 12% of interest of principal Repayment profit O/S at
beginning end of
of year year
1 2 3 4 5 6 7 8
1 57100 0 0 0 0 -2300 57100
2 57100 13704 13704 2000 15704 22700 55100
3 55100 6612 6612 9000 15612 27700 46100
4 46100 5532 5532 14000 19532 32700 32100
5 32100 3852 3852 15500 19325 32700 16600
6 16600 1992 1992 16600 18592 32700 0
Total 31692 57100 88792

Repayment = Six Years including one year moratorium IRR = >50%

Assignment
1. Write your observations about the bankable project given in this exercise
Ex.No:15 Techno- Economic Parameters for Preparation of
Projects for Various Agricultural Products and its Value
Added Products
Dt:

Prepare bankable project on agricultural products and its value added products with
technical details, financial statements, financial feasibility tests, repayment plans and present
it.
Ex.No:16 ANALYSIS OF DIFFERENT CROP INSURANCE
PRODUCTS /VISIT TO CROP INSURANCE
IMPLEMENTING AGENCY
Dt:

Experimental crop insurance schemes

In reality, crop insurance had already emerged, though on a small-scale, experimental basis.
During 1973—76, fertilizer companies, such as Gujarat State Fertiliser Company in Gujarat
and Rashtriya Chemicals and Fertilisers Company in Maharashtra, started pilot crop
insurance schemes as components of agricultural extension projects. Similar experimental
schemes were started in Andhra Pradesh, Karnataka, Tamil Corporation of India (GIC) from
its inception in 1973 until 1976-covered cotton, wheat, groundnut and potato crops, and
2,154 farmers. Another experimental scheme for cotton, covering 909 farmers, was operated
during 1978–79 in Gujarat, Madhya Pradesh and Maharashtra. These loss-making schemes
led to the realization that schemes based on individuals were not practical on a national
scale.
The Pilot Crop Insurance Scheme
Following Prof. Dandekar’s suggestion, GIC prepared a crop insurance scheme based on
the area approach and put it into operation from 1979–80. Initially, it was introduced as a
pilot scheme in three States and was extended to twelve States by 1984–85. Participation
was voluntary. The insurance premium ranged from 5–10 per cent of the sum insured. The
number of farmers covered in a year ranged from 16,000 to 60,000, except for 1984–85,
when 4, 47,000 were covered. The loss ratio was 1.10 over the five-year period from 1979–
80 to 1980–84. The scheme was discontinued in 1985, when CCIS was introduced.

The Comprehensive Crop Insurance Scheme (CCIS)

The Government of India introduced CCIS in the financial year 1985–86. Operated by GIC in
collaboration with the respective State governments, the scheme covered cereals, pulses
and oilseeds. Crop insurance was linked to institutional credit; farmers who availed
themselves of loans for specified crops were eligible for insurance coverage. State
governments were left to decide whether to operate the scheme in the State or not. Once it
was operational, participation of farmers taking out short-term crop loans from credit
institutions was compulsory. The indemnity and premium were shared by the Central and the
State governments in the ratio of 2:1. Originally, the farmer was insured for 150 per cent of
the loan disbursed to him for growing the insured crops; this was reduced to 100 percent in
1988. The rate of premium was uniform for the whole country: 2 per cent of the sum insured
for rice, wheat and millet crops, and 1 per cent for pulses and oilseeds. Even the low rate of
premium was subsidized by 50 per cent in the case of small and marginal farmers. This is in
contrast of the rate of 5–10 per cent in the pilot crop insurance scheme. The latter was
voluntary, whereas CCIS was compulsory.
The scheme was based on the area approach. Area units called “defined areas” were
identified for the purpose of assessing the indemnity. A defined area could be a district, a
taluk, a block or any other contiguous area. The actual average yield per hectare of the
defined area was determined on the basis of crop-cutting experiments. If the actual yield of
an insured crop would fall short of the specified TY, for the area, all insured farmers growing
that crop in that area would be deemed to have suffered the shortfall in the respective yield
and entitled to receive the indemnity.
The Experimental Crop Insurance Scheme (ECIS)
In 1992, even while CCIS was being implemented, GOI considered introducing a new pilot
scheme called the Experimental Crop Insurance Scheme (ECIS) in one district of each
State. The idea was to provide insurance coverage to all farmers, unlike only loanee farmers
under CCIS. A draft scheme was circulated among State governments and national
agencies in 1992. Finally, ECIS was introduced during the Rabi season of 1997–98. The
scheme was similar to CCIS; however, it was meant only for small/marginal farmers (both
loanee and non-loanee) and the premium was fully subsidized. The scheme was operated
during 1997–98 rainy season in Andhra Pradesh, Assam, Karnataka, Orissa and Tamil
Nadu. The indemnity was Rs 37 80 crore against the premium receipt of Rs 2.80 crore. The
scheme was discontinued after one season due to financial problems.

The Pilot Scheme on Seed Crop Insurance (PSSCI)

The Government of India’s PSSCI came into effect from Rabi 1999–2000. The objective was
to provide a sense of financial security to seed breeders and seed growers against failure of
seed crops. The scheme covered breeder, foundation and certified seeds of the following
crops: Cereals (paddy, wheat, maize, jowar [sorghum], ragi and bajra [pearl millet]), Lentils
(soya bean, gram, green gram, black gram, red gram and pea), Oil seeds (sunflower, castor,
mustard, and groundnut), Cotton, jute and Potato

The National Agricultural Insurance Scheme (NAIS)

After NAIS was introduced in Rabi 1999–2000, leading to the discontinuation of CCIS. Like
CCIS, NAIS is primarily based on the area approach. It covers all farmers: loanees and non-
loanees. It envisages coverage of cereals, millets, pulses, oilseeds and annual
horticultural/commercial crops for which adequate yield data are available.

Salient features of NAIS:

States and areas covered: All States and Union Territories had the option of implementing
the scheme.
Farmers covered: All farmers including sharecroppers and tenant farmers growing the
notified crops in the notified areas were eligible for coverage. The scheme was compulsory
for farmers availing crop loans and voluntary for others.
Crops covered: Food crops (cereals, millets and pulses) Oilseeds Annual commercial /
horticultural crops (sugarcane, cotton, potato, onion, chilli, turmeric, ginger, jute, tapioca,
annual banana and annual pineapple)
Sum insured: The minimum sum insured (SI) in case of loanee farmers is the amount of
loan availed, which can be further extended up to value of 150 per cent of average yield. For
non-loanee farmer, it can be up to value of 150 per cent of average yield.
Premium rates: The premium rates are 3.5 per cent for oilseeds and bajra and 2.5 per cent
for cereals, millets and pulses during Kharif; 1.5 per cent for wheat and 2 per cent for other
food crops and oilseeds during Rabi. The rates for annual commercial/horticultural crops are
based on actuals.
Premium subsidy: Premiums for small/marginal farmers are subsidized to the extent of 50
per cent, to be shared equally between the Centre and States. The premium subsidy was to
be phased out over a five-year period on sunset basis, starting with 50 per cent subsidy in
the first year, which would be reduced by 10 per cent each year and was to be completely
phased out in five years. However, 10 per cent subsidy continued to be given till the end.
Scheme approach: The scheme covered losses from sowing to harvesting, and operated
on area approach for widespread calamities. For this purpose, a unit of insurance is defined
which may be a Village Panchayat, Mandal, Hobli, Circle, Phirka, Block, Taluka, etc., to be
decided by the State Government /UT. However, each participating State government/UT
was required to reach the level of village panchayat as the unit within three years. The
Scheme operated on an individual basis for specific localized calamities on an experimental
basis.
Loss assessment, levels of indemnity and threshold yield: The threshold yield or
guaranteed yield for a crop in an insurance unit was the moving average yield, based on the
past three years, in case of rice and wheat, and five years’ yield in case of other crops,
multiplied by the level of indemnity. Three levels of indemnity—90 per cent, 80 per cent and
60 per cent, corresponding to low-risk, medium-risk and high-risk areas—were available for
all crops. The insured farmers of each unit area could also opt for higher level of indemnity
on payment of additional premium. If the actual yield (AY) per hectare of the insured crop for
the defined area fell short of the specified TY, all the insured farmers growing that crop in the
defined area were deemed to have suffered the same amount of shortfall in their yield.
Sharing of risk: Government of India and States shared claims beyond 100 per cent of
premium for food crops and oilseeds on a 50:50 basis. In case of annual commercial /
horticultural crops, claims beyond 150 per cent of premium in the first three or five years and
beyond 200 per cent thereafter was borne by Centre and State on 50:50 basis.

The Pilot Project on Farm Income Insurance Scheme (FIIS)

FIIS was introduced on a pilot basis in fifteen districts of eight States during FIIS was
introduced on a pilot basis in fifteen districts of eight States during Rabi 2003–04. Given that
NAIS was designed to protect farmers against yield fluctuations, it does not address the
problem of price fluctuation or price risk. The income of a farmer depends both on yield and
market price. The new scheme envisaged addressing both yield risk and price risk so as to
stabilize farmers’ incomes. It, however, focused on income in respect to individual crops,
and not the farm income. In other words, insurance was for income from specific crops
instead of the entire income of a farm growing several crops. The scheme was discontinued
on the recommendation of the Joint Group.

Modified National Agricultural Insurance Scheme (MNAIS)

MNAIS was initiated during the 11th Plan from Rabi 2010–11 on pilot basis on the
recommendation of the Government of India Joint Group, in 50 districts. The salient features
of MNAIS are as under: Actual premium, with subsidy in premium ranging up to 75 per cent
to all farmers Only upfront premium subsidy is shared by the Central and State government
on 50:50 basis; all claims liability is on the insurance company Unit area of insurance is
reduced to village/village panchayat level for major crops. More realistic basis for TY
calculation; and minimum indemnity level increased to 70 per cent, from 60 per cent in NAIS.
Like NAIS, MNAIS is compulsory for loanee farmers and voluntary for non-loanee farmers
Private-sector participation to create a competitive crop insurance environment Setting up a
catastrophe-relief fund at the national level, with 50:50 contributions from the Central and
State governments, to provide protection to the insurance companies in the event of
premium to claim ratio exceeding 1:5 at the national level and failure to procure appropriate
reinsurance cover at competitive rates. NAIS was withdrawn from those area(s)/crop(s)
where MNAIS was implemented.
Weather Based Crop Insurance Scheme (WBCIS)
The basic approach of “weather index” insurance is to estimate the percentage deviation in
crop output due to adverse deviations in weather conditions. There are crop models and
statistical techniques available to work out the correlation between crop output and weather
parameters. These techniques attempt to indicate the linkage between the financial losses
suffered due to adverse weather variations and also estimate payouts. WBCIS envisages
such weather index-based insurance products designed to offer insurance protection against
losses to crop resulting from adverse weather Piloted in the Kharif 2007 season, WBCIS
also operates on the concept of area approach. For loss estimation, a Reference Unit Area
(RUA) is deemed to be a homogenous area unit of insurance. Each RUA is linked to a
Reference Weather Station (RWS); claims are determined on the basis of weather data
recorded by the RWS. Adverse weather events during the season entitle the insured to a
pay-out, subject to the weather triggers defined in the “Payout Structure” and the terms and
conditions of the scheme. The claim settlement is an automatic process, based on the
weather readings at the RWS. In a given RUA, the payout given per unit area is the same for
all cultivators under the same RWS. Claims are normally settled within 45 days from the end
of the insurance period. Insurance companies declare a per-unit Sum Insured at the
beginning of each crop season in consultation with experts. This may vary from crop to crop
in each RUA. The sum insured for the loanee farmer is calculated by multiplying per unit
area value of inputs with crop specific acreage declared by the farmer in the loan application
form submitted to the lending bank. For a non-loanee farmer, the acreage figure is expected
area sown/planted under the particular crop as declared in the insurance proposal form.

National Crop Insurance Programme (NCIP)

As mentioned earlier, the Government of India has discontinued NAIS from Rabi 2013–14,
with the exception of a few States for one season only, and launched NCIP from November
2013. In the new programme, WBCIS, MNAIS and Coconut Palm Insurance Scheme (CPIS)
are included as full-fledged schemes with certain modifications over their pilots. Farmers are
entitled to maximum premium subsidy up to 50 per cent under WBCIS and 75 per cent under
MNAIS on a graded scale. Premium rates have been capped according to the type of crop
and season, and in cases where the actuarial premium rates are higher than the capped
limit, the sum insured for such crops will be reduced in proportion to the cap level. The
Ministry of Agriculture, GOI, has also issued operational guidelines for the schemes.
Exercise: Work out claim ratio (Claim / premium) and loss cost (Claim as percentage of sum
insured).