Page 328 - DMGT509_RURAL MARKETING

Unit 17: Role of Microfinance in Rural India

For Financial Institutions and Banks Notes

Figure 17.2: NABARD Setup to help Expand Credit to Farmers

The National Bank for Agricultural and Rural Development (Nabard), set up to help expand
credit to farmers and develop India's villages, is now undertaking a major repositioning exercise
that will see this refinancer switch to a direct financing model, albeit only partially in the
beginning. Nabard will henceforth start funding infrastructure projects in the farm and power
sectors on a commercial basis, a move that is likely to help boost earnings.
This larger repositioning endeavor, for which a professional consultant has been roped in, is
expected to make "Nabard more relevant in the current national context and also improve its
internal efficiency," says K G Karmakar, Managing Director, Nabard, which was established by
an Act of Parliament in 1981 with an initial capital outlay of 100 crore, later enhanced to 2,000
crore. The repositioning is, of course, not without its share of risks.

Key Challenges

The challenges are many. Being a refinancer, the bank has a business model that may have been
more suited to the pre-liberalization era. What Nabard does is raise money from specific sources
and then disburse those funds (at a slightly higher interest rate) to banks and institutions that
interface directly with villagers. This refinance-based model was once widely used by other
development finance institutions as well.
"Over time, others such as SIDBI, ICICI, IDBI and IFCI have all moved to a direct financing-based
business model," says Roy. Nabard is not a listed entity. Even so, it is one of India's top 20 finance
companies in terms of 'total income plus total assets'.

Today, this refinancer has a lending muscle of nearly 1.36 lakh crore, which it uses judiciously-
to refinance commercial, cooperative and regional rural banks for on-lending to the agriculture
and allied sectors, and lend to states for infrastructure development from the Rural Infrastructure
Development Fund (RIDF).
Nabard, which came into being after it was felt that the RBI would be too stretched to meet
India's pressing credit problems, has an RIDF-heavy fund sourcing pattern. In fiscal 2009-10,
nearly 44% of its funding came from RIDF deposits (scheduled commercial banks that do not
fulfil their priority sector lending targets put the difference money in this fund). Income from

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