Micro financing: KCC, Lead bank scheme, RRBs

The term 'Micro Finance' is concerned with literature relating to the DEVELOPMENT &
PROSPERITY of relatively disadvantaged sections of the society etc.

Microfinance (MF) in recent years has become important tool and practiced in varying forms w.r.t the
development initiatives of the Govts. Towards the poor (Particularly in the Third World/Developing
countries).

Microfinance has been practiced in varying forms in different countries. It is regarded as an important
tool for poverty alleviation.

Although MF includes a range of financial services targeted to the poor, But inmost common sense,
micro-credit &Microfinance often are used interchangeably with emphasis on provision of credit to the
poor in the society.

What is Microfinance:

“Micro finance is a financial service of small quantity provided by financial institutions to the poor.
These financial services include savings, credit, insurance, leasing, money transfer, equity transaction,
etc.
Or
"Provision of thrift, credit and other financial services and the products of very small amounts to the
poor in rural, semi urban or urban areas, for enabling them to raise their income levels and improve
their living standards".

Objectives of Microfinance

 Poverty alleviation interventions

 Income distribution amongst a wider section of population Purchasing power redistribution
where large number of people do not have enough purchasing power to participate in a market
economy.
 It is associated with savings in small amount and small loans.
 The affordability, availability, accessibility of small loans in a flexible, sensitive and responsive
manner.
 The availability of timely, adequate uninterrupted finance that cannot provide collateral in a
non bureaucratic style.
 It is a springboard for creating micro entrepreneurs.
 Gender development. Etc

On an average, there is at least one retail credit for about 5000 rural people of
every 100 households. Rural credit from non-institutional sources (informal credit)
more than 36 per cent, indicating the role of moneylenders in the rural credit
system.

United Nations launched the year 2005 as the "INTERNATIONAL YEAR OF

MICROFINANCE". And it is stated that micro finance is an integral part of collective
effort to meet the Millennium Development Goals in the reduction of poverty in
rural areas.

Evolution of Micro Finance:

 Professor. Mohammed Yunus is the father of micro finance in the world.

 The need for rural credit in India had been recognized even before independence by the
erstwhile British Government as early as 1893 when it issued regulations for Taccavi loans to
farmers and subordinate tenants for various purposes.

 The Cooperative Societies Act which was passed in 1904 to provide necessary legislative
support to the financing of agriculture and regulating credit in the interest of cultivators then
signaled the entry of credit for agriculture from the institutional sector.

 Since then, and till the late Fifties, cooperatives have been the major institutional source for all
agricultural loans.

 The syndicate bank which began functioning in 1921 concentrated on raising micro-deposits in
the form of daily, weekly, savings and micro loans for its constituents.

 And after bank nationalization in 1969 micro finance concept in the banks institutions once
again comes to the tore.

 NABARD launched IRDP programme and it was perhaps the biggest micro-credit programme
of our country and in the world as well. Due to not meeting with desired success, In spite of all
these noble efforts, the disadvantaged section of the society could not access financial services
from the formal financial systems and they had to either depend on the informal system or on
themselves for their credit needs and thus created the birth of “micro finance”.

Milestones in evolution of Micro-finance in India

 Microfinance has been in practice for ages (though informally).

 Legal framework for establishing the co-operative movement set up in 1904.
 Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit
Department.
 NABARD established as an apex agency for rural finance in 1982.

How micro finance is different from micro-credit?

In micro credit more emphasis is given on loans, while micro finance includes support service where
we open channels for thrift, market assistance, technical assistance, capacity building, insurance, an
cultural programmes. So micro-finance is not only credit but also the other services provided with it,
while, micro-credit includes only credit component.

Kisan Credit Card (KCC)

The Government of India introduced Kisan Credit Card scheme by banks during 1998 -99. The scheme
was designed by NABARD. KCC aims at adequate and timely support from the banking system to the
farmers for their short-term production credit needs in cultivation of crops, purchase of inputs etc in a
flexible and cost effective manner.

Under this scheme, the farmers would be issued a credit card-cum pass book incorporating the name,
address, particulars of land holding, borrowing limit, validity period etc and it will serve both as an
identity card as well as facilitates the financial transactions. Credit limit on the card may be fixed on the
basis of operational holding, cropping pattern and scale of finance as recommended by the District
Level Technical committee (DLTC) / State Level Technical committee (SLTC).

As per the recommendations of Sri R.V. Gupta committee in the year 1998, on the flow of credit to
agricultural sector, apart from the total credit need, a 20 per cent of total peak level credit requirement
(PLCR) will be given contingent credit need (with a maximum ceiling of Rs.10,000). The KCC should
normally valid up to 3 years and subject to annual review.

Features of KCC:

1. All the farmers with good track record for the last 2 years are eligible for production credit of
Rs.5,000 or more under the KCC Scheme.
2. KCC holders have a credit limit of Rs.25,000 and they can withdraw the loan amount in form of cash
from KCC-cum-passbook. (Maximum credit limit Rs. 3 Lakh)
3. Entire production credit needs for full year and auxiliary expenses are considered.
4. Offer Revolving cash credit facility to farmers
5. Credit limit is fixed based on the individual’s land holdings, cropping pattern, scale of finance,
&annual production credit needs, etc
6. Validity of the KCC is up to 5 years based on the annual review.
7. As incentive for good performance, credit limits could be enhanced to take care of increase in costs,
change in cropping pattern, etc.
8. Loan repaid (each withdrawal) within a maximum period of 12 months.
9. Rescheduling is permitted in the case of crop loss due to natural calamities.
10. Margin, security and documentation terms & conditions are similar to that applicable to agricultural
advances.

KCC is offered by
1. Cooperative banks,
2. Public sector commercial banks, &
3. Regional Rural Banks.

Advantages of KCC:

(1) Access to adequate and timely credit to farmers to buy inputs based on choice
(2) Working capital requirements for allied activities
(3) No need to apply for a loan for every crop
(4) Originally, Credit facility under KCC was for 3 years (presently it is for 5 years) – no need for
seasonal appraisal
(5) Maximum credit limit based on agriculture income
(6) Minimum paper work and simple procedures
(7) Flexibility of drawing cash based on need (Any no. of times)
(8) Reduced interest burden
(9) Repayment only after harvest
(10) Rescheduling of repayment when incur loss due to natural calamities
(11) Accidental insurance of KCC borrowers

Regional Rural Banks (RRBs):

All India Rural Credit Review Committee (AIRCRC) under chairmanship of Sri. B.
Venkatappaiah during the year 1969 was of the opinion that over large parts of the country the marginal
and small farmers were deprived of having access to the cooperative credit both for production and
investment purposes. This stressed the establishment of institutional financial agencies under public
sector. Consequently the first spell of nationalization of banks was done with greater expectations, but
the situation had not changed as per the expectations.

Hence, the Government of India appointed a working committee under the chairmanship of Sri.
M. Narasimham to study the financial assistance rendered to the weaker sections in the rural areas. This
working committee recommended the setting up of rural based institutional agencies called “Regional
Rural Banks” after identifying shortcomings in the functioning of commercial banks and cooperatives.

The Government of India accepted the recommendations of Sri.Narsimham committee and

regional rural banks came in to existence through regional rural banks ordinance on 26th September,
1975. Initially only 5 RRBs were set up on pilot basis with sponsorship of commercial banks on
October 2nd, 1975. This ordinance of 1975 was replaced by the Regional Rural Banks Act, 1976.

In 1975, a new category of banking institution was opened in the form of regional rural banks.
Regional Rural Banks are also called 'Gramin Banks'. These banks are sponsored by the lead bank
of the concerned district. The main aim of Regional Rural Bank is to meet the credit requirements
of marginal and small farmers, landless labourers, rural artisans and small entrepreneurs, these
banks have limited area of operation. Generally, 50 per cent share capital is provided by
Government of India, 15 per cent by the State Government and remaining 35 per cent is
contributed by the sponsoring lead bank (Commercial bank). These banks have a Board of
Directors of 9 members, 4 members are appointed by the Central Government, 2 by the lead bank, 1 by
the State Government and 2 by the Government of India from amongst other share holders. Lead bank
also provides bank staff for two years to start the work.

The list of RRBs first opened in the country is:

List of RRBS Head Quarters

- Syndicate Bank Muradabad (UP)
- S.B.I. Grrakhpur (UP)
- United Bank of India Malda (W.B.)
- Punjab National Bank Bhiwani (Haryana)
- United Commercial Bank Jaipur (Rajasthan)

Objectives:

1. To develop rural economy;

2. To provide credit for agril. & allied field,
3. To encourage village industries, artisans, carpenters etc.,
4. To reduce dependence of weaker sections on money lenders.
5. To fill up the gap created by moratorium on money lenders.
6. To help the poor financially for their consumption needs.

Characteristic features of RRBs:

1. Sponsorship: It sponsored by scheduled commercial banks.

2. Jurisdiction: The operational areas are to be covered by each RRB varies from one to two districts
for efficient functioning. Coming to the population to be served by each branch, it has been kept at
20,000 roughly.

3. Management: Board of directors numbering eight, headed by a chairman, who is the officer of the
sponsoring bank. Of the 8 directors, three are nominees of the sponsoring bank, two from the State
Government dealing with the district development programmes and three from the Central
Government.

4. Share capital: The authorized share capital of RRB has been fixed at Rs. One crore and issued
capital at Rs. 25 lakh. This is contributed by the Central Government, State Government and the
sponsoring bank in the ratio of 50:15:35 respectively.

5. Functions: The main function is, to grant loans and advances particularly to small & marginal
farmers, agril. labourers, co-operative societies, co-operative farming societies for agril. purposes,
artisans etc., within the operational area of the RRB.They also provide banking facilities like issue of
drafts, collection of Cheque, etc
6. Rate of Interest: The rate of interest on the loans changed is the same as collected by PACS. They
allowed offering 0.5% interest more on deposits than that of commercial banks.

Lead Bank Scheme

The Lead Bank Scheme was launched by the RBI in 1969 as an area approach for providing
banking facilities in rural areas. The LBS was recommended by D R Gadgil study group that pioneered
the idea of providing social banking in the post-independence period. Under LBS, every district across
the country would be assigned to a commercial bank. The bank should have major presence in that
district to do the work of the Lead Bank. The lead bank makes surveys and makes loan facility to
various sectors.
The National Credit-Council constituted a study group in October 1968 to recommend an
appropriate organizational frame work, for implementing the schemes which help in achieving the
social objectives set before the country. The study group headed by Prof.G.R.Gadgil, then Deputy
Chairman of the Planning Commission. / Suggested an area approach for banking development. It
recommended that each commercial Bank be allocated districts, so as to take a leading role in its
respective district as regards banking development. The study group felt that this step would help in
extending institutional credit on easy terms to the hitherto neglected sectors, weaker sections of the
society and backward areas. After the nationalization of 14 Major Commercial Banks, the Reserve
Bank of India appointed a Committee of Bankers, headed by F.K.F. Nariman, to evolve a co-ordinate
programme for providing banking facilities to the under banked districts of the country. The committee,
in its report submitted to the Reserve Bank in November 15,1969, recommended the setting up of 'Lead
Banks' in each district. The Nariman committee recommended that Banks should be allocated specific
districts, where they would take the lead in surveying the potential of banking development, in
extending branch expansion and extending credit facilities. The recommendations of the Nariman
Committee was discussed at the Meeting of the standing Committee of Bankers in December, 1969.
The principle of the 'Lead Bank' was accepted at the Meeting. Thus, the Reserve Bank of India, after
careful consideration of the recommendations of the Gadgil study group and Nariman Committee, gave
final shape to the Lead Bank Scheme towards the end of 1969.

OBJECTIVES OF THE LEAD BANK SCHEME

Under the scheme, Lead Banks shared the responsibility of surveying and developing the banking
potential of all the districts. Lead Banks were expected to assume the role of catalytic agents of
economic development in their respected lead districts. They were expected to serve as leaders to bring
about a co-ordination of co-operative banks, commercial banks and other financial institutions in their
respective districts in the interest of district development. This is a very vital role in which the banks
are required to associate and align their operations with planned regional development. On the basis of
the survey, the lead banks were expected to estimate the deposit potential and fill the credit gaps to
improve bank advances in rural areas, especially to priority sectors and weaker sections. The close
involvement of the Lead Bank with a particular area will not only result in deposit mobilization but also
in the expansion of finance to agriculture and small industries. The following important benefits were
expected to flow from the scheme.

(i) The whole country would be served by a well-knit system of commercial and co-operative banking.

(ii) Branch expansion, supervision and guidance would become effective.

(iii)A dynamic relationship between commercial banks, co-operative credit institutions and government
authorities at the district level would evolve.

(iv) Major constraints impeding the development of the districts economy would be identified and the
Lead Bank would induce the appropriate agencies to remedial action.

FUNCTIONS OF THE LEAD BANK

 Reserve Bank of India spelt out the following functions to be performed by the Lead Bank.

 To survey the resources and potential for banking development in its district.

 To survey the number of industrial and commercial units, farms and other establishments which
do not have bank accounts, or which depend primarily on money lenders, increasing the
resources of such units by additional production through help from the banking system.

 To examine the facilities for marketing of agricultural produce and industrial production,
storage and warehousing and the linking of credit with marketing in the district.

 To study the facilities for stocking of fertilizers and other agricultural inputs and repairing and
servicing of equipments.

 To recruit and train staff for offering advice to small borrowers and farmers in the priority
sectors and for the follow-up and inspection of the end use of loans. To assist other primary
lending agencies.