Higher Financing Institutions:
1. RBI
2. NABARD
3. World Bank
4. IMF
5. ADB
6. DICGCI
RESERVE BANK OF INDIA (RBI)
➢The Reserve Bank of India (RBI) was established in 1935 under the Reserve Bank of India Act, 1934.
➢Its headquarters is located in Mumbai.
➢ The RBI was set up to;
✓regulate the issue of banknotes
✓secure monetary stability in the country
✓operate currency and credit system
➢The role of RBI in agricultural credit was found by establishing Agricultural Credit Department
(ACD).
The primary functions of ACD are;
➢To coordinate the operations of RBI with other banks and state cooperative banks in respect of agricultural credit
➢To maintain expert staff to study all the questions of agricultural credit and be available for consultation by the central government, state governments, scheduled commercial banks, and state cooperative banks.
➢To provide legislations to check private money lending and checking other malpractices.
➢ All India Rural Credit Survey Committee (AIRCSC) under the chairmanship of Sri. Norway in 1954 suggested several recommendations about the activities of RBI in the sphere of rural credit.
➢ Based on this, two funds were established after amending the RBI act, 1934.
1. National Agricultural Credit (Long-term operations) Fund-1955:
➢ It started in 1955 with an initial capital of Rs.10 crores and an annual contribution of Rs.5 crores to be added from the profits of RBI in the first five years.
➢ In May 1960, the annual contribution was increased to Rs. 15 crores as per the recommendations on co-co-operative credit.
➢ This fund was meant to provide long-term loans to various state governments to enable them to contribute to the share capital of different types of cooperative societies, including Land Mortgage Banks (LMBs).
➢ Loans and advances out of this fund are made to state governments for a period not exceeding 20 years.
2. NationalAgricultural Credit (Stabilization) Fund-1956:
➢It was started with RBIs initial contribution of Rs. 1 crore and a subsequent annual contribution of Rs. 1crore.
➢This fund is utilized to grant medium-term loans to State Co-operative Banks (SCBs), especially during famines, droughts, and other natural calamities when they cannot repay their loans to RBI.
➢In turn, the state and central cooperative banks and PACS provide a similar facility to the farmer- borrowers regarding short-term production loans taken for crops affected by natural calamities.
➢This helps the farmers get additional finance and, at the same time, reduces their burden of repaying the loans immediately.
Role of RBI in the sphere of Rural Credit
➢The parts/functions of RBI in the realm of rural credit can be seen under three aspects:
1. Provision of finance
2. Promotional activities
3. Regulatory functions
1. Provision of finance:
➢Reserve Bank of India provides necessary finances needed by the farmers through the commercial banks, cooperative banks, and RRBs on a refinancing basis.
➢It advances long-term loans to state governments to contribute to the share capital of the unified credit institutions like State Cooperative Banks (SCBs) and District Cooperative central banks (DCCBs).
➢It advances medium-term loans to State CooperativeBanks.
➢It extends refinance facility to the RRBs only to the extent of 50 percent of outstanding advances.
2. Promotional activities:
➢ Reserve Bank of India constitutes study teams to look into the organization and operation of the cooperative credit institutions all over the country.
➢ It also conducts several surveys and studies about rural credit aspects in the country.
➢ The RBI felt that the cooperatives are the primary force in agricultural credit, and hence following measures were framed for the strengthening of cooperatives.
1. Re-organisation of the state and central cooperative banks on the principle of one apex bank for each state and one central bank for each district.
2. Rehabilitation of those cooperative central banks, which are financially weak due to mounting overdue, insufficiency of internal finances, untrained staff, poor management, etc.
3. Strengthening of PACS to ensure their financial and operational viability.
4. Arranging suitable training programs for the personnel of cooperative institutions.
3. Regulatory functions:
➢Reserve bank of India is concerned with the efficiency of channels through which credit is distributed.
➢Banking Regulation Act, 1966 makes the RBI exercise effective supervision over cooperative banks and commercial banks.
➢As per the Credit Authorized Scheme (CAS) of 1976, the cooperative banks should get RBI prior authorization to provide finances beyond a specific limit.
➢The cash liquidity ratio (CLR) and cash reserve ratio (CRR) are fixed by RBI for cooperatives, farmers service societies (FSS), regional rural banks (RRBs), and agricultural development banks (ADBs) at lower levels than those fixed for commercial banks.
➢For these cooperative banks the bank rate was 3 percent less than that of commercial banks.
➢RBI permits them to pay a 0.5 percent higher rate of interest on deposits.
Credit Control/ Credit Squeeze:
➢ The term credit control or credit squeeze indicates the regulation by the monetary authority, i.e., RBI, on the volume and direction of credit advanced by the banking system, particularly the commercial banks.
➢ At times of inflation, credit control operations aim at the contraction of glory, while during deflation, they aim to expand credit.
There are two methods of credit control:
Quantitative or General Credit control:
➢ It aims at regulating the number of bank advances, i.e., to make banks lend more or less.
Qualitative or Selective credit control:
➢ It aims at diverting the bank advances into specific channels or discouraging them from lending for particular purposes.
Credit Rationing:
➢Any situation in which lenders are unwilling to advance additional funds to a borrower even at a higher interest rate is known as credit rationing.
➢Credit rationing is a situation when banks limit the supply of loans to consumers
➢It is nothing but rationing/controlling of loans/credit to be lent at times of excess demand for credit.
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