Innovation on Rural Banking

India is an agricultural based economy which had around 40% of contribution to GDP in 1995 and has slowed to 17.4% of contribution in 2010. This concludes that agriculture contribution towards GDP is decreasing gradually if this continues then we are soon to face food crises with coming years. The reason for decline in agricultural activities is rapid urbanization, globalization & infrastructure growth. Even the food grains harvested are not stored properly which leads to heavy losses India reported losses around Rs. 600 Cr in 2010. Agricultural sector is dependent on the climatic conditions.

Banks should take an initiative to provide microfinance & microcredit to agricultural sector and fund farmers through intermediaries. The job of the intermediaries is to keep record of all the transaction done by the farmer related to agricultural activities and to collect maximum possible evidence of the transactions and allocate funds to farmers accordingly.

Now the funds are allocated to farmer, farmer cultivates the crop uses latest technologies, fertilizers and does all possible activities to improve the harvest and the output is crops or better quality & quantity with the profits earned farmer can repay his debt. The job of the intermediaries is to monitor the harvest keep records of it and make sure farmer repays the debt provide he earns profits. Now everything goes well until famers borrow, improve harvest pay debts regularly and make some profits.

Now as mentioned agricultural sector being very much dependent on climatic conditions. During uncertain natural calamities such as heavy rains or draught the quality & quantity of harvest will deteriorate. This will affect profits of farmer’s which will lead to farmers not paying their debts and collapse of both the banking system and agriculture sector. To avoid this situation the harvest of the farmer should be insured. The insurance company should pay the debts on behalf of the farmer to the lender (microfinance or microcredit institutions). So this is a win-win situation both for lenders (microfinance or microcredit institutions / banks) and borrowers (farmers).

Now the question is how will the insurance company manage to pay the lenders (microfinance or microcredit institutions / banks) in case the borrowers (farmers) go default. The insurance company should appoint a fund manager whose job is the manage funds collected as premium from the borrowers and should be responsible to repay the debt of the borrower in case of default. It can be done this way the fund manager should trade and take positions in trading rainfall, trading commodities through commodities exchange.

The biggest loophole of this idea is the fund manager should be capable enough to take accurate trade decisions . The reliability of this idea is dependent on the fund manager. The fund manager should

take reasonable decisions depending on the statistical data available and through analytical skills.