Study of the Financial strategies of NABARD in the non-farm sector

Abstract

Developments banks have been primarily created to ensure allocation of scarce resources into desired areas of activities to enable e speedier economic development of the country than would otherwise have been possible. In India, the IFCI use the first development bank and most of the development financial institutions that came after this were also focused primarily at the industrial sector. The agricultural developmental activities were predominantly carried out by the RBI itself. However, the diversity of‘ activities in the rural areas and the increasing emphasis of the government on rural development for example, the initiation of the IRDP in 1979, culminated in the formation of NABARD - a DF1 for activities in the rural areas - in 1982. NABARD soon realized that promoting agricultural activities is not enough since they constitute only about fifty percent of the activities in the rural areas. Realization of this increased the interest of NABARD in promoting the non-farm sector also. A number of schemes and other promotional activities aimed at the NFS were started using the same implementing agencies - the RRB's, PACs and commercial ‘banks - as the agricultural schemes. During this time IUEI too became interested in this small and tiny sector, indicating a shift from its earlier predominantly medium and large scale industrial orientation. The IDBI too came out with innovative ideas and schemes and also entered the agencies hitherto primarily used by NABARD. Thus, of late the NFS has become a major field for new operations of the two largest DFI's in the country NABARD end IDBI. Though the absolute amounts of advance to this sector are limited, serious attempts are being made by both to increase their presence in this area. The report presents two activities specifically studied a traditional activity Financed through cooperative group lending it the weaving; and e non-traditional activity helped by individual credit I the diamond-cutting industry. The evidences collected have shown e number of interesting aspects of lending in the rural sector. Apart from credit facilities, other auxiliary facilities have to be provided if not already available else there is a high probability of e default. This is especially so due to the fungibility of credit - it may be given for one purpose but it may not be used for the desired purpose. Thus giving concessional credit may induce the people to burrow but it may be used for non-productive purpose unless proper controls are maintained, which raise the cost of lending for the lending agency. On the other hand, the transaction costs for a rural borrower from a formal lending agency can be so high due to paper work, transportation and fixed repayment schedule that borrowing from informal money 7 lenders may be more convenient, even if the money is available at exorbitant interest rates. These transaction costs for IUBI are much higher both from the point of view of the lending agency and the borrower due to their traditional activities in the larger sector. NABARD has the experience in dealing with the rural activities and extension into the NFS, though requiring a development of certain skills, may he more cost-effective. Thus some issues that need to be further considered are the clear definition of the role of NABARD and IDBI in the NFS, possibility of me of local VLN's as loan agents for the lenders in order to reduce transaction Costs as also to improve the recovery at the village level; increased flexibility in repayment of loans due to local/individual constraints; increased innovations in the form of different loan products and a need to demarcate the scope of the NFS. The report will be primarily useful to officials engaged in the planning and designing of implementation systems for the NFS.