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Indian Economic Policy

Notes For instance, in areas where the subsoil water table is high, the small cultivator has to be helped by
banks to convert his dry holding into wet holding. With a pumpset loan, the cultivator can change
the cropping pattern into double or even multiple cropping activity. As regards small cultivators
near urban areas and with irrigation facilities, commercial banks can help them to go in for poultry
farming and maintaining one or two vegetable cultivation or combine it with small milch cattle.
Problems of Commercial Banks in Agricultural Credit
The annual credit needs of the agricultural sector in the next few years are estimated to rise to
` 2,00,000 to ` 3,00,000 crores. To meet these needs is an enormous task, and responsibility will have
to be borne by cooperatives and commercial banks. As resources available to commercial banks in
the agricultural sector will naturally be limited, it is important that every commercial bank attempts
to make optimum use of its limited resources in this sector.
In the field of financing of agriculture, the problem is not merely quantitative but also of coverage
vis-a-vis the organisation and the personnel available to the nationalised banks. The majority of the
rural population consists of small farmers. Further, there are 5,50,000 villages spread throughout the
country. To reach all of them with only about 47,000 banking offices is, no doubt, a stupendous task.
Even with the completion of the branch expansion programmes of the commercial banks now in
hand or those which may be undertaken during the next 5 to 10 years, commercial banks may not be
in a position to cover many of the villages. Moreover in recent years, the rural branches of commercial
banks in general and branches of regional rural banks (RRBs) in particular have been under severe
financial strain on account of higher transactions costs involved in handling of large number of small-
size loan accounts and somewhat lower interest income as a result of concessional rate of interest on
small-size loans. The lower proportion of current deposits in total deposits of rural branches has also
placed them at a disadvantage with regard to cost of resources. Finally, the presence of overdues,
particularly after the implementation of Agricultural and Rural Credit Debt Relief Schemes, 1990 has
further adversely affected the viability of rural branches of commercial banks.
Under these conditions, if the development of agriculture is not to suffer for want of credit and if
there has to be some improvement in the lot of innumerable small farmers, new dimensions will have
to be given to schemes of financing agriculture.
Nabard and Its Role in Rural Credit

Since its inception, RBI had shown keen interest in agricultural credit and maintained a separate
department for this purpose. RBI extended short-term seasonal credit as well as medium-term and
long-term credit to agriculture through State level co-operative banks and land development banks.
At the same time, RBI had also set up the Agricultural Refinance Development Corporation (ARDC)
to provide refinance support to the banks to promote programmes of agricultural development,
particularly those requiring term credit. With the widening of the role of bank credit from “agricultural
development” to “rural development” the Government proposed to have a more broad-based
organisation at the apex level to extend support and give guidance to credit institutions in matters
relating to the formulation and implementation of rural development programmes. A National Bank
for Agriculture and Rural Development (NABARD) or the National Bank, for short, was, therefore,
set up in July 1982 by an Act of Parliament to take over the functions of ARDC and the refinancing
functions of RBI in relation to co-operative banks and RRBs. NABARD is linked organically with the
RBI by the latter contributing half of its share capital—the other half being contributed by the
Government of India—and nominating three of its Central Board Directors on the board of NABARD,
besides a Deputy Governor of RBI being appointed as Chairman of NABARD.
Resources of NABARD

The authorised share capital of NABARD was ` 500 crores and its paid-up capital was ` 100 crores,
contributed equally by the Central Government and the Reserve Bank. The paid-up capital of NABARD
was raised from ` 100 crores to ` 500 crores and then to ` 2,000 crores by the year 1999-00. The
resources of the National Agricultural (long-term operations and stabilisation) funds were transferred
to NABARD. World Bank and IDA have also been providing funds to NABARD for implementation

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