What is NABARD - History, Functions, Importance, Challenges

What is NABARD? Learn about NABARD objectives, Functions, vision and mission for NABARD Grade A 2024. Also, read the achievements of NABARD.

What is NABARD?

• NABARD is a development bank focusing primarily on the rural sector of the country. It is the apex banking institution to provide finance for Agriculture and rural development.
• Its headquarter is located in Mumbai, the country’s financial capital.
• It is responsible for the development of the small industries, cottage industries, and any other such village or rural projects.
• It is a statutory body established in 1982 under Parliamentary act-National Bank for Agriculture and Rural Development Act, 1981.

History - How NABARD came into Being?

• The importance of institutional credit in boosting rural economy has been clear to the Government right from its early stages of planning.
• The Reserve Bank of India (RBI) at the insistence of the Government of India, constituted a Committee to Review the Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD) in 1979, under the Chairmanship of Shri B. Sivaraman, former member of Planning Commission.
• The Committee’s report (1979) outlined the need for a new organizational device for providing undivided attention, forceful direction and pointed focus to credit related issues linked with rural development.
• It resulted in foundation of NABARD (National Bank for Agriculture and Rural Development) in 1982 as a statutory body under Parliamentary act-National Bank for Agriculture and Rural Development Act, 1981.
• Its initial paid up capital was Rs. 100 cr. contributed with 50: 50 by government of India and Reserve bank of India. It stood at Rs. 10,580 cr. as on 31 March 2018.
• To support Indian Rural economy with credit facility, RBI was apex body before formation of NABARD.
• It resulted in making NABARD as an apex development financial institution in India.
• The NABARD’s role is basically a continuation of the RBI role in the sphere of Agriculture and Rural Development.
• The functions of the 3 institutes of RBI (1) the Agricultural Credit Department (ACD), (2) Rural Planning and Credit Cell (RPCC), (3) and Agricultural Refinance and Development Corporation (ARDC) were transferred to NABARD.
• ACD: RBI provided through its ACD short term refinance to cooperatives.
• RPCC: It was dealing with the Regional Rural Banks (RRBs) since 1979
• ARDC: RBI set up the Agricultural Refinance Corporation (ARC) in 1963 to work as a refinancing agency in providing medium term and long term agricultural credit to support investment credit needs for agricultural development.
• In 1975, ARC was renamed as Agriculture Refinance and Development Corporation (ARDC) to give focused attention to credit off-take, development and promotion of the agricultural sector.

Vision

• Development Bank of the Nation for Fostering Rural Prosperity

Mission

• Promote sustainable and equitable agriculture and rural development through participative financial and non-financial interventions, innovations, technology and institutional development for securing prosperity.

Functions of NABARD

NABARD (National Bank for Agriculture and Rural Development) plays a pivotal role in fostering rural development across India. Let’s delve into its functions and impact:

A. Credit Functions:

1. NABARD prepares potential-linked credit plans annually for all districts, identifying credit potential.
2. It monitors the flow of rural credit and issues policy guidelines to rural financing institutions.
3. It provides credit facilities to eligible institutions under various programs.
4. Notable schemes include those related to farm sectors, village adoption, backward blocks, and biofuels.

B. Developmental and Promotional Functions:

1. NABARD promotes integrated rural development by providing credit to agriculture, small-scale industries, village industries, and handicrafts.
2. It supports other allied economic activities in rural areas.
3. The institution inspects district and state cooperative banks and regional rural banks.

C. Supervisory Functions:

• NABARD supervises cooperative banks, regional rural banks, and other financial institutions.
• It ensures compliance with guidelines and regulations, maintaining financial stability in rural areas.

D. Institutional and Capacity Building:

1. NABARD strengthens rural financial institutions through capacity building.
2. It facilitates training programs for bankers, farmers, and other stakeholders.

E. Role in Training:

• NABARD conducts training sessions to enhance the skills of rural professionals.
• These programs cover various aspects of rural development, including sustainable practices and financial literacy.

How NABARD Transformed?

The NABARD (Amendment) Bill, 2017 passed in 2018: Amendment in Act enabled Union Government to increase the authorized capital of NABARD from Rs. 5,000 crore to Rs. 30,000 crore.

• Increase in capital of NABARD: Under the 1981 Act, NABARD may have a capital of Rs 100 crore. This capital can be further increased to Rs 5,000 crore by the central government in consultation with the Reserve Bank of India (RBI).
• The Bill allows the central government to increase this capital to Rs 30,000 crore.
• Transfer of the RBI’s share to the central government: Under the 1981 Act, the central government and the RBI together must hold at least 51% of the share capital of NABARD.
• The Bill provides that the central government alone must hold at least 51% of the share capital of NABARD.
• The Bill transfers the share capital held by the RBI and valued at Rs 20 crore to the central government.
• The central government will give an equal amount to the RBI.
• Micro, small and medium enterprises (MSME): Under the 1981 Act, NABARD was responsible for providing credit and other facilities to industries having an investment of upto Rs 20 lakh in machinery and plant.
• The Bill extends this to apply to enterprises with investment upto Rs 10 crore in the manufacturing sector and Rs five crore in the services sector.
• Under the 1981 Act, experts from small-scale industries are included in the Board of Directors and the Advisory Council of NABARD.
• Further, banks providing loans to small-scale, tiny and decentralized sector industries are eligible to receive financial assistance from NABARD.
• The Bill extends these provisions to the micro, small, and medium enterprises.

NABARD v/s RBI – How are they Different?

• NABARD provides recommendations to Reserve Bank of India on issue of licenses to Cooperative Banks, opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs).
• Many developmental and regulatory works are done by RBI and NABARD in co-operation.
• RBI provides 3 directors to NABARD’s Board of Directors.

What is the Structure of Governance of NABARD?

Board of Directors

• NABARD's affairs are governed by a Board of Directors. The Board of Directors are appointed by the Government of India in consonance with NABARD Act. It is constituted of following:
• The Chairperson,
• 3 directors from amongst experts in
• rural economics,
• rural development,
• village and cottage industries,
• small-scale industries,
• or persons having experience in the working of co-operative banks, regional rural banks or commercial banks,
• or any other matter the special knowledge or professional experience which is considered by the Central Government as useful to the National Bank,
• 3 directors from out of the directors of the Reserve Bank,
• 3 directors from amongst the officials of the Central Government,
• 4 directors from amongst the officials of the State Government,
• such number of directors elected in the prescribed manner, by shareholders other than the Reserve Bank, the Central Government and other institutions owned or controlled by the Central Government,
• The Managing Director,
• The Chairperson and other directors (except elected ones by share-holders and officials of the Central Government) shall be appointed by the Central Government in consultation with the RBI.
• Executive Committees
• The Board of Directors may constitute an Executive Committee consisting of such number of directors (called Executive Director) as may be prescribed.
• The Executive Committee shall discharge such functions as may be prescribed or may be delegated to it by the Board.

How NABARD Contributes to the Development of Rural Economy?

The NABARD has touched almost every aspect of rural economy in terms of Financial, Developmental and Supervision functions

Financial Contribution

• Refinance - Short Term Loans: Crop loans are extended to farmers for crop production by financial institutions, which support in ensuring food security in the country.
• Long Term Loans: NABARD's long-term refinance provides credit to financial institutions for a wide gamut of activities encompassing farm and non-farm activities with tenors of 18 months to more than 5 years.
• Rural Infrastructure Development Fund (RIDF): It was set up with NABARD in 1995-96 by the RBI out of the shortfall in lending to priority sector by scheduled commercial banks for supporting rural infrastructure projects.
• Long-Term Irrigation Fund (LTIF): The LTIF in NABARD was setup with an initial corpus of Rs 20,000 crore for funding 99 irrigation projects during 2016-17 following announcement in the Union Budget.
• Pradhan Mantri Awaas Yojana - Grameen (PMAY-G).
• NABARD Infrastructure Development Assistance (NIDA): NIDA has been designed to complement RIDF.
• Warehouse Infrastructure Fund (WIF): Union government created WIF in the year 2013- 14 with NABARD with a corpus of Rs 5,000 crore for providing loans to meet the requirements for scientific warehousing infrastructure for agricultural commodities in the country.
• Food Processing Fund
• Direct Lending to Cooperative Banks
• Credit Facility to Marketing Federations (CFF):
• Producer Organizations Development Fund (PODF) for POs & PACS: NABARD set up Producer Organizations Development Fund (PODF) with an initial corpus of Rs 50 crore to support and finance Producer Organizations (POs) and Primary Agriculture Credit Societies (PACS) to operate as Multi Service Centre's.
• Producer Organization (PO): it is a legal entity formed by primary producers, viz. farmers, milk producers, fishermen, weavers, rural artisans, craftsmen. A PO can be a producer company, a cooperative society or any other legal form which provides for sharing of profits/benefits among the members.
• Primary Agricultural Credit Society (PACS) is a basic unit and smallest co-operative credit institution in India. It works on the grassroots level (gram panchayat and village level). It provides credit to farmers in the form of term loans and recovers the amount after harvesting of crop from the cultivator.

Developmental Contribution

• Kisan Credit Card Scheme for Farmers: The Kisan Credit Card (KCC) scheme was designed by NABARD in association with the RBI in August 1998 for providing crop loans.
• RuPayKisan Cards (RKCs): NABARD has been at the forefront of technology revolution by helping rural financial institutions in providing RuPayKisan Cards (RKCs) to all their farmer clients.
• Tribal Development: the Tribal Development Programme
• Climate Resilient Agriculture
• Umbrella Programme on Natural Resource Management (UPNRM): The UPNRM started in 2007, works at enhancing investments in rural areas, creating business opportunities and enabling rural communities to sustainably utilise their natural resources.
• Microfinance Sector: NABARD had launched the Self Help Group-Bank Linkage Programme (SHG-BLP) in 1992. Over 23 lakh SHGs were credit-linked during 2017-18 financial year.
• EShakti: In a bid to digitize SHGs, project EShakti was launched on 15 March 2015.
• Skill Development: Promoting an entrepreneurial culture among the rural youth and encouraging them to start enterprises in the rural off-farm sector has been NABARD’s strategy for over three decades.
• Marketing Initiatives: For providing marketing opportunities to rural artisans and producers, NABARD has traditionally facilitated their participation in exhibitions across the country.

Incubation Centre

• To commercialize innovations and to shape agricultural entrepreneurship in the country, NABARD extended support to Chaudhary Charan Singh Haryana Agricultural University, Hisar and Tamil Nadu Agricultural University, Madurai for establishing Agri Incubation Centres with a total financial commitment of Rs 23.99 crore.

What are the Challenges faced by NABARD?

• Credit Delivery: Despite NABARD’s efforts, last-mile credit delivery remains uneven. Farmers often rely on informal sources due to bureaucratic processes and delays.
• Financial Inclusion: Ensuring access to formal financial services for all rural households remains a challenge. Many remote areas lack bank branches, ATMs, and digital infrastructure.
• Cost of financing has gone up since market borrowings of NABARD add up to 80 per cent of its resources.
• Member-driven and de-bureaucratized cooperative structures have to fill-in the gaps of institutional credit left open by commercial banks.
• The north-eastern states has been getting little share of the NABARD’s credit funds.
• The northeast gets 1% of the credit, leading to farmers trapping in the net of money-lenders.
• The penetration of banks in insurgency-hit state is less and it should be stepped up.

Model Practice Question & Answer

✅Discuss the challenges faced by the Rural Credit in India and suggest reforms to address them. (400 Words, 20 Min)

Agriculture is the primary source of income of individuals residing in the rural regions across India. Every year, farmers and peasants need to invest a considerable amount of funds to ensure a healthy harvest. Thus, they often resort to borrowing money from moneylenders and financial institutions to fulfill their basic needs before harvest season arrives. Various agencies, including commercial bank, regional rural bank (RRBs), co-operatives, small finance banks (SFBs), NBFCs, micro-finance institutions (MFIs) and indigenous bankers together form the rural credit delivery system in India.  

The Indian rural financial sector faces a number of challenges that impede its effectiveness in providing inclusive and sustainable financial services to rural populations. Following are some of the challenges:

I. Limited access to formal financial services and Low Banking Penetration::  Many rural areas lack adequate banking infrastructure. A large proportion of the rural population still does not have access to formal financial services such as bank accounts, loans, and insurance. This is due to a number of factors, including lack of awareness, limited financial literacy, and distance to bank branches.

II. Lack of financial literacy: Many rural people lack financial literacy, which makes them vulnerable to financial fraud and exploitation.

III. Seasonality of income: The income of rural people is often seasonal, which makes it difficult for them to get timely loan and repay loans.

Suggested Reforms:

I. Innovative Financial Products: Encourage the development of innovative financial products that cater to the specific needs of rural customers, including customized savings products, micro-insurance, and investment options.

II. Investment in Rural Infrastructure: Prioritize investments in rural infrastructure, including roads, electrification, and digital connectivity, to improve access to financial services and stimulate economic activities.

III. Empowerment of Self-Help Groups (SHGs): Continue and strengthen initiatives that empower and support SHGs, as they play a significant role in promoting financial inclusion and community development.

IV. KCC for credit facility.

V. Strengthening micro finance institutions.

In conclusion, by addressing these challenges and implementing suggested reforms, India can strengthen its rural financial sector, promote financial inclusion, and contribute to the overall development of rural communities. 

✅Critically examine the role of NABARD in promoting rural development in India. (400 Words, 20 Min)

NABARD is a development bank focusing primarily on the rural sector of the country. It is the apex banking institution to provide finance for Agriculture and rural development. It is a statutory body established in 1982 under Parliamentary act-National Bank for Agriculture and Rural Development Act, 1981. NABARD’s initiatives are aimed at building an empowered and financially inclusive rural India through specific goal oriented departments which can be categorized broadly into three heads: Financial, Developmental and Supervision.

NABARD's mandate includes:

I. Providing refinance to commercial banks, regional rural banks, and cooperative banks for lending to agriculture, small-scale industries, cottage and village industries, handicrafts, and other allied economic activities in rural areas.

II. Promoting rural infrastructure development through financing and technical assistance.

III. Preparing district-level credit plans and monitoring the flow of credit to rural areas.

IV. Supervising cooperative banks and regional rural banks.

NABARD has played a significant role in promoting rural development in India through its various interventions. Some of its key achievements include:

I. Providing refinance support to banks for lending to agriculture and other rural sectors. In 2022-23, NABARD disbursed refinance loans of Rs. 1.64 lakh crore to banks.

II. Financing rural infrastructure development projects such as irrigation, roads, bridges, and warehouses. In 2022-23, NABARD sanctioned Rs. 3.05 lakh crore for rural infrastructure development projects.

IV. Promoting financial inclusion in rural areas through its SHG-Bank Linkage Programme. As of March 2023, NABARD had linked over 87 lakh SHGs with banks, providing them with access to credit and other financial services.

IV. Supporting the development of rural non-farm sectors such as handicrafts, handlooms, and agro-industries. In 2022-23, NABARD sanctioned Rs. 50,000 crore for the development of rural non-farm sectors.

However, NABARD's role in promoting rural development has also been criticized by some. 

I. Limited Reach in Some Regions: Despite its widespread presence, there are disparities in NABARD's reach, with some regions still facing challenges in accessing financial services and development initiatives.

II. Dependency on Traditional Credit Models: NABARD has traditionally focused on credit-based models, and there is a need for a more holistic approach that integrates credit with other essential components of rural development.

III. Infrastructure Implementation Challenges: The implementation of rural infrastructure projects financed by NABARD has faced challenges such as delays, cost overruns, and sometimes, insufficient community participation.

In conclusion, NABARD has played a commendable role in promoting rural development in India, particularly in the areas of credit facilitation, financial inclusion, rural infrastructure, and agricultural innovations. However, there are challenges and areas for improvement, including addressing regional disparities. NABARD has an important role to play in Amrit Kaal, as for India to become developed, its villages need to be developed, and NABARD is directly responsible for this.

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