Report No 1520-IN Second Agricultural Ref inanced ...

Report No 1520-IN

Second Agricultural Ref inanced DevelopmentCorporation Credit Project IndiaMay 12, 1977 V

South Asia Projects Department

FOR OFFICIAL USE ONLY FILE Cpy

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their otficial duties Its contents may nototherwise be disclosed without World Bank authorization

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CURRENCY EQUIVALENTS

US$1.00 = Rs 9.00 1/

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS

ACD - Agricultural Credit Department (RBI)APC - Agriculture Projects CourseADB - Agricultural Development BranchesARDC - Agricultural Refinance and Development CorporationARDC I - First Agricultural Refinance and Development Corporation

Credit ProjectBTC - Bankers Training CollegeCAB - College of Agricultural Banking, PoonaCB - Commercial Banks

CCAS - Coordination Committee for Agricultural Surveys andStudies

CGWB - Central Groundwater BoardDCCB - District Central Cooperative BanksFSS - Farmers' Service SocietiesGOI - Government of India

HYV - High Yielding Varieties

LDB - Land Development Banks (Generic term for allSLDB and PLDB whether operating on a fed-erated or unitary system)

NIBM - National Institute of Bank ManagementPCR - Project Completion ReportPCS - Primary Cooperative SocietiesPLDB - Primary Land Development BanksPPA - Project Preparation and Appraisal CourseRBI - Reserve Bank of India

RRB - Regional Rural Banks

SCB - State Cooperative Banks

SFDA - Small Farmers Development AgenciesSLDB - State Land Development Banks

CROPPING SEASONS

4 Kharif - June to September

Rabi - October to February

Summer - March to May

FISCAL YEAR

ARDC - July I to June 30

GOI - April 1 to March 31

1/ Until September 25, 1975, the Rupee was officially valued at a fixedPound Sterling rate. Since then, it has been fixed against a "basket"of currencies. As these currencies are floating, the US Dollar/Rupeeexchange rate is subject to change. Conversions in this report havebeen made at US$1.00 to Rs 9.00, which was the short term average rateprevailing at the time of appraisal.

FOR OFFICIAL USE ONLY

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Table of Contents

Page No.

SUMMARY AND CONCLUSIONS ................................... i - v

I. INTRODUCTION .................. 1..................

II. BACKGROUND ........................ . 1A. The Agricultural Sector ......................... 1B. Agricultural Credit and Agricultural Credit

Institutions ........... 3

III. PERFORMANCE OF BANK GROUP FINANCED AGRICULTURALCREDIT PROJECTS IN INDIA ............................. 8

IV. THE PROJECT ..................................... 11

A. General ..................................... 11B. Detailed Features ............................... 11

V. COST ESTIMATES AND FINANCING .... ..................... 15

A. Cost Estimates .................................. 15

B. Proposed Financing .............................. 16C. Procurement ..................................... 16

D. Disbursement .................................... 17

VI. PROJECT ORGANIZATION AND LENDING ARRANGEMENTS ........ 17A. Organization ........................................ 17

B. Lending Arrangements ..... ....................... 18C. Accounts and Audit ...... ........................ 21D. Lending to Small Farmers and in Lesser

Developed States ....... ... ........ ....... 21E. Monitoring, Evaluation and Reporting .... ........ 22

VII. PRODUCTION, MARKETING, PRICES, AND FINANCIALRETURNS TO PROJECT BENEFICIARIES .... ............... 23

VIII. ECONOMIC BENEFITS AND JUSTIFICATION ................... 25

IX. AGREEMENTS REACHED AND RECOMMENDATIONS .... ........... 27

Schedule A - Groundwater Utilization - Districts ContainingIntensively Developed and/or Potential Problem Areas

Schedule B - Criteria for Spacing a-cxd Density of WellsSchedule C - Project Lending Terms and ConditionsSchedule D - Small Farmer Definitior£

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its content may not otherwise be disclosed without World Bank authorization.

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ANNEXES

I Bank Group Projects Financed through ARDCTable 1 - Summary of Bank Group Projects Financed through ARDCTable 2 - Summary of Results from ARDC Evaluation StudiesTable 3 - Selected Financial and Economic Indicators from

Gujarat Agricultural Credit Project (191-IN) PCRTable 4 - Preliminary Results from Farm Benefit Survey

in Andhra Pradesh

2 Groundwater and Minor IrrigationTable 1 - Surface Water Resources - Estimated Runoff

Table 2 - Estimated Groundwater Availability and Utilization - 1973/74Table 3 - Net Area Irrigated by Sources - 1970/71Table 4 - State Groundwater Organization Staffing - November, 1976Table 5 - Irrigation Wells - Anticipated Achievement as at June 30,

1974Table 6 - Villages Electrified as at March 31, 1974

3 Cooperative Banks, Cooperative Land Development Banks and CommercialBanks

Appendix 1 - Summary of the Main Recommendations of the Committeeon Integration of Cooperative Credit Institutions

Appendix 2 - Summary of the Recommendations of the Talwar CommitteeAppendix 3 - Review of the Status of Agricultural Credit and

Agricultural Credit Institutions on a State-by-State Basis

Appendix 4 - Interest Rates in IndiaTable 1 - State Cooperative Banks - Summary of Overdues (1971/72

to 1975/76)Table 2 - State Land Development Banks and Primary Societies -

Summary of Overdues (1971/72 to 1975/76)

4 Agricultural Refinance and Development CorporationTable 1 - Average Borrowing and Lending Rates (1963/64 to 1975/76)Table 2 - Analysis of Interest Rate StructureTable 3 - Board of Directors

Table 4 - Projected Staff Estimates - 1976/80

Table 5 - Organization Chart

Table 6 - Schemes Under Consideration as at September 30, 1976Table 7 - Purposewise Disbursements since InceptionTable 8 - Local Resources MobilizationTable 9 - ARDC Condensed Statement of Income and Expenditure -

1971/72 - 1980/81Table 10- ARDC Condensed Balance Sheets - 1971/72 - 1980/81

Table 11- ARDC Cash Flow - 1972/73 - 1980/81Table 12- Growth since Inception

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ANNEXES (Cont'd)

5 Diversified Lending in AgricultureTable 1 - Index Numbers of Area, Productivity and Production -

1949/50 - 1975/76Table 2 - Progress of Agricultural Programs - 1971/72 - 1975/76

Table 3 - Fertilizer Consumption in IndiaTable 4 - Growth Rate of Production of 38 Major Crops - 1950/51 -

1975/76

6 TrainingTable 1 - Training of Senior and Middle Level Officers under

ARDC ITable 2 - Projected Training of Senior and Middle Level OfficersTable 3 - Estimated Training Cost - Project Period 1978 and 1979

(calendar)

7 Small Farmers Development Agencies

8 Monitoring, Evaluation and ReportingAppendix 1 - On-going Agricultural SurveysAppendix 2 - End-of-Scheme Reports

9 Financial AnalysisTable 1 - Minor Irrigation Models: Cropping PatternsTable 2 - Minor Irrigation Models: Crop Budgets for one haTable 3 - Minor Irrigation Models: Income StatementTable 4 - Minor Irrigation Models: Cash Flow ProjectionsTable 5 - Model 6: Coconut (without irrigation) 0.5 haTable 6 - Model 7: Dairy (2 cross-bred cows)Table 7 - Model 8: Poultry (1,000 layers)Table 8 - Model 9: 11 m. Mechanized Fishing VesselTable 9 - Model 10: Mechanized CanoeTable 10- Financial Rate of Return Sensitivity Tests

10 Economic AnalysisTable 1 - Economic Rates of ReturnTable 2 - Economic Rate of Return Sensitivity TestsTable 3 - Financial and Economic Prices

11 Schedule of IDA Estimated Disbursements

12 ARDC Lending ProgramTable 1 - Estimated Project Lending ProgramTable 2 - ARDC Total Estimated Disbursements - 1977/78 and

1978/79Table 3 - Indicative Cost Estimates

MAP

IBRD 12630 Generalized Occurrence of Groundwater, Rainfall and Evaporation

INDIA


SUMMARY AND CONCLUSIONS

i. Since 1969, the Bank and IDA have financed 25 projects in Indiawhich involve, in one degree or another, the provision of agricultural credit.The Agricultural Refinance and Development Corporation (ARDC) has been a keyagency in all these operations. Twelve projects were solely agriculturalcredit operations; of these, eleven supported credit programs in individualStates and one was a general line of credit to ARDC (ARDC I). Through thetwelve agricultural credit projects ARDC has had access to some US$429 M ofBank Group lending over the last eight years. Of this, it has utilized sofar US$287 M (67%).

ii. The institutional developments sponsored under the State orientedprojects have strengthened ARDC, Land Development Banks (LDB), and StateGroundwater Boards. These improvements were such that in 1975 IDA decidedthat a line of credit could be provided by IDA to ARDC in which field levelappraisal, carried out by IDA in the case of the State projects, could beundertaken by ARDC itself. Credit 540-IN for US$75 M financed the ARDC Iproject and became effective in August 1975. Project costs totalled US$168.5M. Of this credit, US$69 M (92%) was allocated for minor irrigation, US$5 M(6%) for diversified agricultural lending, and US$1 M (2%) for training andstudies. Disbursements, as of December 31, 1976, amounted to US$31.2 M or100% of appraisal estimates. Projections, based on ARDC commitments, indicatethat Credit 540-IN will be fully disbursed by June 30, 1977 (six months aheadof the current Closing Date).

iii. The perennial problem plaguing medium and long term credit objec-tives in India is excessive LDB overdues the level of which varies from Stateto State. In some States they persist at high levels, for example, about 59%in Maharashtra and Himachal Pradesh. Agreement was reached between ARDC andIDA during negotiations of ARDC I credit that a system of gearing the issuanceof special debentures to recovery performance would be introduced. This wasimplemented by ARDC as of June 1975, and applied later by the Reserve Bankof India (RBI) to ordinary debentures. The gearing formula, the objective ofwhich was to achieve a minimum standard level of recoveries, would also applyto the proposed project.

iv. Also under ARDC I, GOI agreed to establish a committee to examinethe desirability of integrating the short term and long term activities ofthe cooperative credit structure. The Committee on Integration of CooperativeInstitutions concluded that there is inadequate short term credit support forinvestment credit granted by LDB and that this results in investments beingunder-productive. Conversely, development credit has not always been forth-coming in areas where short term credit is being provided to farmers. TheCommittee has recommended integration, in a phased manner, of the two activ-ities at all levels of the cooperative credit structure.

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v. The project appraised in this report, ARDC II, is a follow-up to

the 1975 ARDC I operation. The increase in the amount of the proposed creditfrom US$75 M for ARDC I to US$200 M reflects the substantial increase in ARDC'sprojected lending program, which itself is based on past performance and on GOINational Commission on Agriculture's credit requirement estimates. The projectlays special emphasis on meeting the medium and long term credit needs of smallfarmers, and of those States where agricultural development is lagging. Theproject would provide finance for the continuation of on-going programs of minorirrigation development and of other agricultural, livestock, and fisheries de-velopment activities planned for implementation during the two years beginningJuly 1977 and for which a need for refinancing by ARDC is anticipated. Minorirrigation loans would be made to individual farmers or groups of farmers.Investments would include open dugwells, pumpsets, and shallow tubewells. Onthe basis of experience under ARDC I, about 350,000 minor irrigation unitswould be installed under the Project, which would provide either primary orsupplemental irrigation water to a total of about 0.9 M ha. Well constructionwould present few problems as, in addition to public sector corporations estab-lished for this purpose in each State, there are many private contractorsskilled in and equipped for this work. Electric and diesel pumpset suppliesare satisfactory and should pose no constraints to development. Adequate spareparts and good servicing facilities are available. To obtain maximum benefitsfrom minor irrigation, some farmers would also be granted loans for on-farmdevelopment such as land leveling, bunding, field drainage, and realignment offield boundaries. Loans for deep tubewells, each of which would provide watersufficient for several farmers and command between 20 and 100 ha, would be madeto groups of farmers, cooperatives and State Corporations. Many States havepublic sector corporations which own and operate such equipment and sell irri-gation water to farmers. Similar arrangements would be employed for largecapacity pumps for irrigation from rivers and other surface water sources.Minimum spacing between wells is essential to avoid over-exploitation of theresource and interference between individual water users. Guidelines forminimum spacing and permissible density of wells have been defined and wouldbe enforced. Finance would not be provided for investments in areas definedin this project as restricted for further groundwater development unless theState Government concerned had either instituted controls acceptable to ARDCover sinking new wells in these areas, or had carried out studies satisfactoryto ARDC that indicated that such areas could be removed from the list ofrestricted areas.

vi. Diversified lending would include a range of agricultural, livestockand fisheries activities. Many of these activities have been the subject ofState oriented Bank Group financed projects under which technologies and lendingtechniques have been proven.

vii. The project would involve relatively small investments on individ-ual farms throughout India. As in other ARDC operations financed by the BankGroup, project beneficiaries would be given freedom of choice in the procure-ment of equipment, goods and services.

viii. The north eastern region of India, comprising the States of Assam,Bihar, Orissa and West Bengal is an area where agricultural development lags.

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Yet most of the region enjoys moderate to heavy monsoon rains and large areasof relatively fertile soils, and there is a vast, mainly unexploited, surfaceand groundwater resource. ARDC has recognized the need to increase lendinglevels in these and other lesser developed States and has participated withIDA in review of their potentials. Under the project a minimum of 25% of ARDCrefinancing is expected to be disbursed in such States which, in addition tolesser developed areas in the north eastern region States, include parts ofHimachal Pradesh, Rajasthan, and Jammu and Kashmir. Lending in many of thoseStates would be facilitated by on-going or proposed IDA financed projectsdirected at improving agriculture research, extension and other supportingagricultural institutions.

ix. Present training arrangements for lending institutions are gener-ally satisfactory. ARDC is aware that deficiencies have existed, and insome instances still exist in the training program - mainly the lack oftraining materials at the LDB training centers. The project would continueto expand training programs for: (i) senior and middle level staff of themain agricultural lending institutions; and (ii) LDB junior staff. Bothactivities have been initiated under the ARDC I credit and are proceedingsatisfactorily.

x. Project costs are estimated at Rs 5,247 M (US$583 M) of which aboutUS$26 M are duties and taxes. The proposed IDA credit of US$200 M would bemade to GOI on standard terms, and would finance about 34% of total projectcosts or about 36% of project costs net of duties and taxes. The credit wouldcover the foreign exchange costs of about US$73 M and about US$127 M (25%) oflocal costs. About 50% of total project costs would be provided by ARDC andGOI, 9% by participating banks, and 7% by borrowers. A Subsidiary Agreement,satisfactory to IDA, would be executed between GOI and ARDC, under which GOIwould make: (i) US$1 M of the IDA proceeds available to ARDC, as a grant forstaff training, and for a groundwater survey; and (ii) US$199 M available toARDC, repayable partly over 9 years at 6.75% and partly over 15 years at 7.25%(with 0.25% rebate for prompt repayments of principal and interest) dependingupon the repayment period of ARDC refinance to participating banks. GOI wouldbear the foreign exchange risk.

xi. Cost estimates are based on the ARDC indicative lending program forthe period 1977/78 to 1978/79 which is drawn from estimates of agriculturalinvestments requiring ARDC refinance, prepared for the various States. Ad-justments have been made for finance provided under on-going IDA projects.Estimates are expressed in current prices and incorporate a price increasecontingency at an annual rate of 7% in accordance with Bank estimates offuture price movements in India.

xii. The IDA disbursements would be made against ARDC certified state-ments of loans made by participating banks and refinanced by ARDC, and ofexpenditures on training, and the groundwater survey. Disbursements wouldbe 55% of ARDC refinance for minor irrigation and diversified agriculturallending (excluding special categories such as tractors, energization of pump-sets, and forestry schemes which would be financed wholly from ARDC own re-sources), and 50% of the cost of training and survey. Final beneficiaries

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would be individual or groups of farmers and fishermen, cooperatives andpublic and private sector companies and corporations. Emphasis would be givento small farmers who would receive at least 50%, in terms of amount, of loansmade under the project, and to States where agricultural development is lagging.

xiii. ARDC would have primary responsibility for carrying out the project.Through its refinancing of participating banks, it would control the flow ofproject funds and contribute to the sound development of agricultural creditinstitutions throughout India. ARDC would refinance, by way of loans or pur-chase of special debentures, up to 90% of individual loans issued by partici-pating LDB, commercial banks (CB) and State Cooperative Banks (SCB). Parti-cipating banks would compete for project business: there would be no specificallocations of funds between them. To be eligible to participate, LDB wouldhave to meet the overdues criteria (para iii), and SCB would have to have arecovery rate of not less than 75% of demand. All CB, which are regulatedby RBI, would be eligible.

xiv. The ARDC lending program is implemented through a large number ofarea schemes. Under each scheme, credit is provided for one particular typeof investment, for example, pumpsets or dairy cattle, within a compact area.Initiation and formulation of a scheme is normally by local banks in coopera-tion with State Government agencies. In lesser developed States, however,ARDC assists with scheme formulation and preparation. Schemes are submittedto ARDC for appraisal. Appraisal covers not only technical and financialfeasibility, but also an assessment of the administrative and organizationalcapacity of supporting institutions, including extension, input supply andseasonal credit.

xv. ARDC performance under the ARDC I project has been consistentlygood as has been the case in the other Bank/IDA financed projects in whichit has participated. ARDC has been scrupulous in its adherence to agreementsand undertakings and has been regular in submitting required reports, docu-ments and accounts.

xvi. The structure of interest rates in India is considered to be ade-quate. There is little inter-sectoral distortion: the differentials chargedby institutions lending primarily to agriculture and those lending to industryare small. To industry the rate is between 11% and 12%. Commercial banklending rates for agricultural purposes are about 13% when using their ownfunds. Under this project, participating banks, including commercial banks,would receive funds at minimum annual interest rates of 7.5% for minor irri-gation and on-farm development, and 8% for diversified agricultural lending.Final beneficiaries would borrow at minimum rates of 10.5% for minor irriga-tion and on-farm development, and 11% for other agricultural purposes. Underthe project, ARDC would ensure that interest rates charged on loans wouldbe sufficient to enable ARDC and participating banks to: (i) cover alloperating expenditures and charges, including taxes (if any), and interestpayments on borrowings; and (ii) maintain adequate provisions for bad debtsand adequate general reserves. While present interest rates are generallyadequate to cover the costs of lending operations, most LDB would benefitfrom an increased "spread" to allow continued expansion of operations to

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meet the needs of small farmers, and in the interest of long term financialviability.

xvii. Reports from participating banks and field supervisions by ARDC,termed 'follow-up' studies, are the main source of information on the progressof ARDC refinanced schemes. During the project period several hundred schemesper annum would be inspected by ARDC and several thousand beneficiaries visited.ARDC would improve the efficiency of its scheme supervision through: (i)clearer guidelines for the selection of schemes for supervision and of bene-ficiaries for interview; (ii) standardization of data collection; and (iii)refinement, reduction and timely analysis of data collected.

xviii. The project's primary economic benefits would be an increase inagricultural production for domestic consumption and export. At full devel-opment, the annual value of such increases is estimated at about US$367 M interms of 1976 prices. Economic rates of return have been calculated, basedon the experience gained under on-going ARDC schemes. They should be regardedas indicative since they are only a sample of what might be achieved. Theoverall economic return of the project would be about 32%.

xix. Beyond the realization of substantial benefits arising out ofon-farm investments, the project aims at the continued build-up of strongerinstitutions. Strengthening of the ARDC technical units and improvements inthe Corporation's monitoring and evaluation systems should result in betterpreparation, appraisal and monitoring of schemes, thus reducing investmentrisks. Strengthening of LDB through intensified staff training would sup-port this. Measures to better control overdues through tying the issuanceof new debentures to recovery performance should lead to further reductionin LDB overdues and thus increase the availability of funds for investments.The number of project beneficiaries would be substantial; an estimated 1.0 Mfarmers would participate. Incremental annual employment generated by projectinvestment is estimated at about 175 M man-days. Much of the additional laborwould be supplied by unemployed or underemployed members of beneficiary fam-ilies. However, a significant part would be provided by hired laborers.

xx. The main risk in this type of project is inadequate appraisaland monitoring of schemes, leading to poor performance of some investments.ARDC experience shows that the risk is slight, and continuing institutionalimprovement through this project should further reduce it.

xxi. The project is suitable for an IDA credit of US$200 M on standardterms.

INDIA


I. INTRODUCTION

1.01 In August 1975, an IDA credit (540-IN) for US$75 M, was made toIndia's Agricultural Refinance and Development Corporation (ARDC). Thatcredit, which supported a project costing US$168.5 M, is now entirely com-mitted and expected to be fully disbursed by June 30, 1977, six months aheadof schedule. In July 1976, the Government of India (GOI) asked IDA for furtherfinancial assistance to ARDC.

1.02 The project proposed for IDA financing gives special emphasis tomeeting the medium and long term credit needs of small farmers, and to thoseStates where agricultural development is lagging. The project would be afollow-up to a number of past and on-going projects in which IDA and ARDC haveparticipated and which are described in Chapter III and Annex 1.

1.03 This report is based on an application prepared by ARDC and on thefindings of an appraisal mission which visited India in November 1976, consist-ing of Messrs. R. L. Headworth, C. Helman, G. Slade and R. Van Wagenen (IDA),and K. Anderson, H. L. Manning and Mac E. Whitsitt (Consultants), W.R. Grawe(IDA) also contributed to the report.

II. BACKGROUND

A. The Agricultural Sector

2.01 India's 610 M population is growing at the rate of about 2.3% peryear and per capita income (US$115 in 1975) at about 1.4%. Agriculture isthe most important sector. It employs about 70% of the population, contributesabout 45% of GNP, and provides a major share of exports. A basic problem ofthe economy is the low growth rate in agricultural production, especiallyfoodgrains, which has been only about 2.3% per annum over the last decade andabout the same as the rate of population increase. Even in normal years, itis necessary to rely on stock or imports to meet the demand for foodgrains,and it is only in exceptional growing seasons that there is a surplus ofproduction.

2.02 Much progress has been made already in increasing the use ofimproved technology and expansion of the irrigated area. For example, overthe last five years (1971/72-1975/76), the area planted in high yieldingvarieties (HYV) increased by about 70% to some 31 M ha. Fertilizer consump-tion, which grew rapidly between 1960/61-1973/74 from 294 to 2,839 thousandtons of nutrients, while declining during 1974/75 to 2,591 thousand tons as a

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result of price increases, increased to 2,892 thousand tons in 1975/76 andis expected to resume its growth in the wake of GOI efforts to stimulatedemand. Between 1971/72-1975/76, the gross irrigated area increased by about18% to about 45 M ha, of which about 40% is served by groundna_er, much of ita result of groundwater development financed under ARDC schem2s (Annex 2).

2.03 GOI attributes the highest priority to achievement 5f self-sufficiency in food. The strategy enunciated for agriculture In the FifthPlan, 1974/79, acknowledges that because of the limited scope for bringingnew land into cultivation the greatest part of future increments in food pro-duction, and of foodgrains in particular, must come from increases in levelsof land productivity. The Plan acknowledges also that a prerequisite forthis is an assured irrigation water supply to: (i) permit uiltiple cropping;rainfall over most of India permits only one assured crop a year; and (ii)provide supplemental irrigation. in the rainy season; in many s-asons rainfallis inadequate for optimal produ.ction of the single rainfed crici Consequently,the Plan provides for major investments in irrigation both by the public sec-tor, mostly in major surface irrigation schemes, and by the private sectorin groundwater development though minor irrigation involving idugwells, pump-sets, and shallow tubewells, The project appraised in this -egort wouldprovide support for this latter effort. The groundwater prcgram is parti-cularly important in that it mobilizes private resources for development andgenerally results in a more efficient use of irrigation water than is usuallythe case in public sector surface schemes which generally involve heavy sub-sidies of both capital and operating costs. Also significant is that overthe last 25 years the rate of growth in groundwater based on irrigation hasfar exceeded that of surface water schemes reflecting the more difficultinstitutional problems associated with public surface water schemes.

2.04 The area irrigated from groundwater resources increased from about6.5 M ha in 1950, to 9.5 M ha in 1965 and to 17 M ha in 1975, when it comparedwith about 27 M ha water surface irrigation. The sharp rate 3f increase since1965 has been partly a result of the introduction of high yielding crop varie-ties (HYV) to India and recognition by farmers and the authorities thatobtaining the full potential from these needed an assured wa-_e- supply. Itis estimated that, at full development, India's groundwater resources couldirrigate over 35 M ha. There is, therefore, considerable sco7e for furtherdevelopment of this resource although there is wide variation between Statesin the extent to which it has so far been developed. States such as Gujarat,Haryana, Punjab, Rajasthan and Tamil Nadu have operated intensive groundwaterdevelopment programs for many years and now have exploited at least 50% oftheir resources. On the other hand, in many of the poorer States such asWest Bengal, Orissa and Bihar, resources are large and the extent of exploita-tion very low. In a review of the foodgrain production situation in theStates of the eastern region 1/ which covered the preceding S_ates as wellas the eastern part of Uttar Pradesh, and Assam, the Bank identified consid-erable scope for groundwater development and, in conjuction with GOI, the

1/ The Eastern Region Foodgrains Production Reviews (972- U; 1173-IN,1175-IN).

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State Governments, and ARDC, has formulated plans for the accelerated devel-opment of groundwater which would be financed in part under the proposedproject.

2.05 While expanded foodgrain production, and in its pursuit, theexploitation of groundwater resources, demand the highest priority, there isa growing need for other and more diversified agricultural development. Suchdiversification is important to: (i) better utilize India's diverse climaticand soil resources; (ii) produce a wider range of foods and raw materials inthe interests of better nutritional standards, for example milk and fish, andof increased agricultural exports, such as coffee or cashew products; and(iii) improve income and employment prospects of the rural poor who eitherhave no or very little land but who can participate in activities such aspoultry and dairying. Diversification would be sponsored under the proposedproject. This would include a wide range of investments in horticulture andtree crops - coconut, coffee, tea, mango, citrus; livestock - dairy, poultry,sheep; fisheries - marine and inland, as well as investments in storage facili-ties, and some farm machinery.

B. Agricultural Credit and Agricultural Credit Institutions

2.06 The great bulk of short term credit, possibly as much as 70%, foragriculture in India has been provided traditionally by private money lenders,usually at very high interest rates, and the remainder by cooperative andcommercial banks. In recent years, there has been a significant growth ininstitutional credit and the relative importance of private money lenders hasdeclined. Institutional short term credit for agriculture amounted to aboutRs 11,840 M in 1976 and long and medium term institutional credit to aboutRs 5,250 M.

2.07 Institutional credit for agriculture is provided by cooperativeinstitutions and commercial banks. The cooperatives, organized on a Stateby State basis, comprise two distinct classes of institutions. The short/medium term credit structure is three-tiered. Consisting of a State Coopera-tive Bank (SCB), Central Cooperative Banks and Primary Societies, it dis-burses loans for periods not exceeding five years for seasonal crop inputsas well as their marketing, and also for other investments in agriculture.The long term credit structure comprises a State Land Development Bank (SLDB)which functions through branches or affiliated Primary Land Development Banks(PLDB) and provides long term loans for periods ranging from 5 years to 15years, for agricultural development. Since its organization over 70 yearsago, the cooperative system has considerably expanded in some of the States.However, performance has been variable from State to State and from year toyear. It has been relatively poor in the lesser developed States of the northeastern region.

2.08 In view of the remaining inadequacies of the cooperative structure,particularly in the north eastern States, GOI in recent years has sponsoreda multi-agency approach to agricultural credit. Thus, where the cooperativecredit structure is weak and limited in its agricultural lending (e.g. becauseof excessive overdues) the commercial banks (CB) have been induced to parti-cipate and encouraged to open more rural branches. As a consequence, andwith the encouragement of IDA, major progress in agricultural lending has beenrecorded by the commercial banking structure in recent years. The AgriculturalRefinance and Development Corporation (ARDC), refinanced some Rs 710 M foragricultural lending by the CB in 1975/76 compared with Rs 280 M in 1974/75.Initially, CB experienced some disadvantages, mostly of a legal and adminis-trative nature, vis-a-vis the cooperatives. These issues were examined by acommittee (known as the Talwar Committee) headed by a former Chairman of theState Bank of India. The recommendations of this committee are summarizedin Annex 3, Appendix 2. They have been implemented by about ten States andin these States CB enjoy the same privileges as cooperative banks in suchmatters as exemptions or relaxations in the payment of stamp duty, registrationof charges, as well as priority in claims over charges created on securityoffered (para 2.18).

2.09 More recently, with a view to supplementing the resources of coopera-tives and CB and in particular to meet the credit requirements of small andmarginal farmers, cottage industries, and rural artisans, GOI has started toestablish Regional Rural Banks (RRB) especially in lesser developed areas.These RRB are expected to combine the operational efficiency of CB and theintimate local knowledge of the cooperatives. So far, about 30 such RRB havebeen set up under the sponsorship of scheduled commercial banks. As RRB arestill fairly new and have yet to prove their capabilities, they would not beincluded in the project.

2.10 In Annex 3, Appendix 3, the status of agricultural credit andagricultural credit institutions is reviewed on a State by State basis. Thereview indicates a very wide range of circumstances. Problems that are commonto a number of States are summarized below:

(i) slow progress of the financial and organizationalrehabilitation of cooperative banking institutions -Andhra Pradesh, Bihar, Kerala;

(ii) inadequate number of trained bank personnel and thusa constraint on expansion - Andhra Pradesh, Bihar;

(iii) State Ordinances that prevent LDB lending other thanfor purposes directly connected with land - Gujarat,Tamil Nadu;

(iv) constraints on commercial bank lending - Kerala,Gujarat and other States where recommendations ofthe Talwar Committee are yet to be implemented(para 2.18);

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(v) out of date land records which constrain loans requiringsecurity of a land mortgage - Assam, Madhya Pradesh, Orissa;and

(vi) inadequate agricultural extension services which constrainthe demand for agricultural credit - Assam, Bihar, MIadhyaPradesh, Orissa, Rajasthan, Uttar Pradesh, West Bengal.

2.11 Progress is being made in resolving the above problems. Given,however, the very large numbers of institutions and the complex administra-tive and legal issues involved, the pace of progress has varied from Stateto State. The rehabilitation of cooperative institutions usually involvesbetter credit and financial discipline and the measures being taken in thisregard are discussed in para 2.15. Training of bank personnel is being fi-nanced under ARDC I and will also be a component of the proposed Project(para 4.08). A GOI committee has recommended changes in the security re-quirements employed by LDB (para 2.12), and IDA is financing a project thatincludes updating land records in Orissa. Also, IDA is financing or ispreparing projects that consist primarily of improving extension servicesin Assam, Bihar, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and WestBengal.

2.12 Under ARDC I, GOI agreed to establish a committee to examine thedesirability of integrating the short term (SCB) and long term (LDB) activi-ties of the cooperative credit structure. The Committee on Integration ofthe Cooperative Credit Institutions concluded that, generally, there is in-adequate institutional short term credit support for investment credit grantedby LDB and that this results in investments being underproductive. Conversely,development credit has not always been forthcoming in areas where short termcredit is being provided to farmers. The Committee has recommended integra-tion, in a phased manner, of the two activities at all levels of the coopera-tive credit structure. Provisions in the statutes of several LDB that canlend only against security of land were also identified by the Committee aspreventing LDB from diversifying their lending operations into for example,financing schemes for dairy development and sheep breeding. The main recom-mendations of the Committee are summarized in Annex 3, Appendix 1. Duringnegotiations it was agreed that GOI would continue its on-going discussionswith State Governments with the objective of initiating implementation ofthe recommendations of the Committee in at least two States during the proj-ect period, and would advise IDA of progress through ARDC progress reports.

2.13 Given the complex nature of the problems and the different agro-economic and political conditions in the various States, a specific deadlinefor resolving all the problems affecting agricultural credit would be impos-sible to set and to enforce. However, during negotiations GOI and ARDC con-firmed that they would continue their dialogue with individual States onproblems affecting agricultural credit. The objective of such discussionswould be to agree on the major problems and identify a specific action pro-gram and timetable designed to alleviate constraints over a reasonably shortperiod. Progress would be recorded in ARDC progress reports.

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Land Development Banks (Annex 3)

2.14 During 1975/76, LDB accounted for about 21% of long and mediumterm institutional lending for agriculture in India, and for about 58%of ARDC refinancing volume. Farmers and State Governments are the mainshareholders of the LDB, which are established under State laws, and areinspected and their borrowings regulated by the Reserve Bank of India(RBI). The LDB provide both long and medium term credit mostly againstthe security of land mortgages. The main sources of State Land DevelopmentBank (SLDB) funds are: (i) ordinary debentures; and (ii) special debentures.Issue of ordinary debentures is sanctioned by RBI on the basis of each bank'sneed and financial viability, and are available for purchase by individuals,State Governments, CB, and other institutions, such as the Life InsuranceCorporation of India. Ordinary debentures are guaranteed by the StateGovernment of the issuing SLDB, are for a fixed term, usually between 5 and15 years, and bear interest, currently about 6.5%. Special debentures arepurchased by ARDC and the government of the concerned State, and are alsoguaranteed by the State Government. They differ, however, in being retiredby annual installments in agreement with ARDC and the financing institutions.The proportion of total LDB financing through special debentures increasedfrom 22% in 1971/72 to about 52% in 1974/75 and is expected to increasefurther.

2.15 The perennial problem of LDB is overdues 1/. Levels vary from Stateto State, ranging from nil % to 60% at SLDB level and from 3% to 42% at pri-mary land development bank (PLDB) level. In some States, they persist athigh levels, for example, about 59% in Maharashtra and Himachal Pradesh(Annex 3, Table 2). Agreement was reached between ARDC and IDA during nego-tiations of Credit No. 540-IN (ARDC I) that a formula of gearing the issuanceof special debentures to recovery performance would be introduced. This wasimplemented by ARDC as of June 1975, and applied later by RBI to ordinarydebentures. In accordance with the formula, LDB would be eligible to issuea percentage of debentures (ordinary and special) issued in previous years(annual average of last three years, or the previous year, whichever is thegreatest) according to a set sliding scale of recoveries. Under the formula,an SLDB branch or PLDB would not be eligible for ARDC refinance unless ithad a recovery rate of not less than 40%. Any SLDB branch or PLDB which hadalready achieved 75% recovery rate would not be refinanced by ARDC if itsrecovery rate fell below 75%, taking into account any State Government in-jection of equity paid in to reduce overdues (limited to 10%, maximum). Atthe same time, any SLDB branch or PLDB which had not achieved 75% would notbe eligible for refinance if its recovery rate was less than tbiat of theprevious year; in other words, the formula does not permit backsliding. In

1/ In India, overdues at the end of the fiscal year are expressed as apercentage of "demand" (principal and interest falling due during theyear, plus overdues from previous years). Given the greatly varyingcriteria used in different countries, it is not possible to compareIndia overdue performance with that elsewhere.

FY76, there was an improvement in a number of States, for example, SLDB re-coveries in West Bengal increased to 100% from 75% in FY75. There are signsthat this improving trend is continuing. Most State Governments, appreciatingthe serious effect of high LDB overdues on future agricultural development,are actively assisting LDB to recover overdues; the results of their effortsshould favorably reflect in LDB accounts for the year ending June 30, 1977.The objective of the arrangements under ARDC I was to bring all LDB to aminimum standard level of 75% recovery; these arrangements would continueuntil October 31, 1978. After that date, the arrangements are that ARDC wouldnot refinance any SLDB branch or PLDB if its collection was less than 75% ofdemand, of which up to a maximum of 10% could be by way of additional equityprovided by the State Government. However, in some of the lesser developedStates, where recovery progress has been slower than in other States, andwhere lending is essentially geared towards the special needs of small farmers,it may be necessary for the formula to be modified slightly from time to time.Such modifications, which would be temporary, would be agreed between IDA andARDC, provided that such modifications would not detract from achieving theobjective of the criteria to strengthen the rural credit framework. An RBI/ARDC committee has been formed to develop common norms for issuance of LDBdebentures; this committee, which is operating satisfactorily, would recommendto IDA any proposed formula modifications. It was agreed during negotiationsthat the arrangements described above for the issuance of both ordinary andspecial debentures would apply throughout the duration of the project and thatany modifications would be subject to IDA approval.

2.16 A further problem common to many LDB arises from the practice byState Governments of seconding State Government officers to head LDB. Oftenthose officers do not have the necessary training and experience to run an LDBefficiently. Most staff at this level are seconded from cooperative divisionsof State Governments and are subject to transfer at short notice. These staffchanges, which occur frequently, have an adverse effect upon the efficiencyof LDB. ARDC has requested State Governments to ensure that State staff ondeputation remain with the LDB for at least three years after their training.During negotiations IDA discussed with GOI and ARDC the possibilities of LDBdrawing up programs for permanent staffing as a condition of obtaining refin-ance from ARDC; those discussions would be followed up during project super-visions.

State Cooperative Banks (Annex 3)

2.17 The cooperative credit system is the major source of short terminstitutional credit to farmers, providing about Rs 8,875 M during 1975/76.This was about 52% of total direct institutional lending for agriculture.The main sources of SCB funds are share capital, deposits, and loans fromRBI. SCB are eligible for ARDC refinancing but received less than 1% oftotal ARDC refinancing during 1975/76. As with LDB, the main problem ofSCB is heavy overdues which in 1974/75 ranged from nil% in Haryana to 68%in Himachal Pradesh. Because of the small amount of refinance made availableto them, ARDC influence over SCB is small. However, to participate in ARDCschemes, including those to be financed under the proposed project SCB musthave a recovery rate of not less than 75%.

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Commercial Banks 1/ (Annex 3)

2.18 The CB started lending in a modest way for agricultural purposesin 1969. During the last few years they made significant progress, providingabout 33% of long and medium term direct institutional credit for agriculturein 1975/76, as well as some short term funds. Contributing to the increasedactivity of recent years have been participation in ARDC development schemessupported by provision of refinance by ARDC, and implementation by some Statesof recommendations of the Talwar Committee (para 2.08), that have improved thecompetitiveness of CB vis-a-vis LDB by removing some of the costs incurred byCB borrowers. Ten States have enacted legislation embodying the Talwar rec-ommendations and draft bills are ready in several others. ARDC is encouragingearly implementation of this legislation in all States, thus, CB now competewith both LDB and cooperative banks for available business and provide stimulifor improvement in the agricultural sector as a whole. A growing problem ofCB has been overdues on their agricultural loans. However, CB have been betterable to withstand arrears than LDB due to their diversified and remunerativelending in other sectors.

III. PERFORMANCE OF BANK GROUP FINANCED AGRICULTURALCREDIT PROJECTS IN INDIA

3.01 Since 1969, the Bank and IDA have financed 25 projects in Indiawhich involve, in one degree or another, the provision of agricultural credit.ARDC has been a key agency in all these operations. Twelve projects weresolely agricultural credit operations; of these eleven supported creditprograms in individual States. The success of these State oriented projectsled to IDA financing an India-wise agricultural credit project (ARDC I)(Credit 540-IN) in 1975 (para 3.03). Through the twelve agricultural creditprojects ARDC has had access to some US$429 M of Bank Group lending over thelast eight years. Of this, it has utilized so far US$287 M or 67%. The in-dividual projects are listed in Annex 1.

3.02 State Oriented Projects. Eight of the State oriented agriculturalcredit projects are on-going and three have been completed recently. A typicalState agricultural credit project has financed a three to four year lendingprogram to farmers covering investments mostly in minor irrigation (about 80%of investments), land leveling, and farm mechanization. Under these projectsparticular attention has been paid to strengthening the institutions involvedin project implementation, most importantly the participating LDB (as describedin para 2.14) and the States' groundwater agencies. Each State project has

1/ Nearly all commercial banks are scheduled. A banking institution canclaim inclusion in the Schedule, provided: (i) it satisfies RBI thatits affairs are not being conducted in a manner detrimental to theinterests of its depositors; and (ii) its paid-up capital and reserveshave an aggregate value of not less than Rs 0.5 million.

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required the State Government either to establish a Groundwater Directorateor to strengthen an existing agency in the interest of ensuring proper useof groundwater and thereby of project funds provided for minor irrigation.General preconditions of Bank Group support for the State projects have in-cluded: (i) participation of a viable LDB with acceptable levels of staff andfinancial operations; (ii) satisfactory policies and procedures for lending;and (iii) adequate support services for participating farmers, especiallyagricultural extension, input procurement and distribution, marketing, andshort term production credit. In all the State projects disbursements havetended to lag behind appraisal estimates because of lower than anticipateddemand for loans for land development, and procurement problems in the caseof farm mechanization. Conversely, disbursements for minor irrigation usuallyhave been in advance of forecasts. Of the eight on-going project, six areexpected to be fully disbursed by June 30, 1977, and the remaining two byDecember 31, 1978 and March 31, 1980 respectively.

3.03 ARDC I. The institutional developments sponsored under the Stateoriented projects have strengthened both ARDC and the LDB. These improvementswere such that in 1975 GOI and IDA decided that a line of credit could beprovided by IDA to ARDC in which field level appraisal, carried out by IDA inthe case of the State projects, could be undertaken by ARDC itself. Credit540-IN for US$75 M financed the ARDC I project, and became effective in August1975. Project costs totalled US$168.5 M. Of the IDA credit, US$69 M (92%)was allocated for minor irrigation, US$5 M (7%) for diversified agriculturallending, and US$1 M (1%) for training and studies. Disbursements, as atDecember 31, 1976, amounted to US$31.2 M, 100% of appraisal estimates. Pro-jections based on ARDC commitments indicate ARDC should fully disburse Credit540-IN by June 30, 1977 (six months ahead of the current Closing Date).About 55% of actual disbursements have been made against loans to small far-mers, (see para 6.13 and Schedule D), compared with an appraisal target of50%. Disbursement proportions of about 90% of total lending for minor irri-gation and 7% for diversified agricultural development are in line withappraisal estimates. Estimates of individual investments financed underthe project up to October 31, 1976, are shown in the following table:

DairyDugwell & Fishing Cattle/ Tree Crop

Dugwells Pumpset Tubewells Pumpsets Boats Sheep Plantings…-------------------- No. … …(ha)---

LesserDeveloped

States 1,550 1,150 4,300 15,900 - 400 137

OtherStates - 19,100 4,200 24,500 194 10,100 1,627

Total 1,550 20,250 8,500 40,400 194 10,500 1,764

A short description of the above types of investment appears in Chapter IV.

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The project included some training for LDB staff and this program is progress-ing satisfactorily (para 4.08). It provided also for a comprehensive study ofthe training needs of junior level LDB staff. This was completed and thetraining program recommended would be financed under the proposed project.Importantly, the Committee on Integration of Cooperative Credit Institutionswas established under the project. This Committee and its findings andrecommendations are discussed in para 2.12.

3.04 ARDC performance under the ARDC I project has been consistentlygood as has been the case in the other Bank/IDA financed projects in whichit has participated. The Corporation has been scrupulous in its adherenceto agreements and undertakings and has been regular in submitting requiredreports, documents, and audited accounts. Full details of ARDC are inAnnex 4.

Economic Impact of IDA Financed ARDC Projects

3.05 Investment in minor irrigation, under State based agriculturalcredit projects, began in 1970. However, as it takes farmers about threeto four years to adjust cropping patterns and techniques to optimize returnsfrom investments in irrigation it was 1974 before a meaningful assessmentof benefits became possible. The first ex-post evaluation of minor irriga-tion schemes by IDA was in 1975, in the course of preparation of a ProjectCompletion Report (PCR) for the first State agricultural credit project(Gujarat, 191-IN). Despite two severe drought years during the projectimplementation period resulting in the complete drying of several wells andreduced water availability in numerous others, estimates of financial ratesof return (FRR) ranged from 12% to 30% for minor irrigation investments, witheconomic rates of return for the same investments averaging 28%. These returnswere later confirmed in an audit by the Bank's Operations Evaluation Department(Report No. 1303).

3.06 ARDC itself has recently completed the evaluation of minor irri-gation investments elsewhere and these indicate FRR ranging between 29% andover 50%. In addition, a large number of beneficiaries have been inter-viewed during ARDC monitoring studies, which included a comparison of crop-ping patterns, inputs and outputs with planned ones. The findings indicatethat most farmers benefit substantially from investments in minor irrigationand that further investments are justified. During 1970/76 the number ofmotorized dugwells and tubewells in India doubled, increasing in number byabout 1.4 M units. Additional data is being gathered by ARDC and LDB andwill be analyzed in the PCR for the nine agricultural credit projects(including ARDC I) which are scheduled to be completed by June 30, 1978.Evaluation surveys are already underway for three of these projects andpreliminary results from one of them, Andhra Pradesh, are summarized inAnnex 1, Table 4.

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IV. THE PROJECT

A. General

4.01 The project would provide finance for the continuation of on-goingprograms of minor irrigation development and of other agricultural, livestock,and fisheries development activities planned for implementation during thetwo years beginning July 1977, and for which a need for refinancing by ARDCis anticipated. Project funds would be channeled through ARDC which wouldrefinance loans made by participating banks. Final beneficiaries would beindividual or groups of farmers and fishermen, cooperatives, public and pri-vate sector companies, and corporations. The project would be a follow-upto ARDC I (para 3.03), and project activities would be a continuation of andsimilar to those financed under that project. As under ARDC I and the Stateoriented projects, participating banks would develop schemes under which asingle activity, for example, shallow tubewells, fisheries, etc., would bepromoted in a limited physical area in which all necessary support serviceswould be provided to participants (para 6.07). As under ARDC I, minor irri-gation development would predominate, and is estimated to utilize about 75%of project costs which are estimated at US$583 M. The project would also pro-vide finance, US$1.95 M for the training of agricultural banking staff, andUS$0.05 M for a sample agro-economic survey of tubewells and other groundwaterstructures in eastern Uttar Pradesh. As in ARDC I, emphasis would be given tosmall farmers who would receive at least 50%, in terms of amount, of loansmade under the project and to States where agricultural development is laggingand where a minimum of 25% of project funds would be disbursed. Funds wouldnot be allocated to specific States, but during negotiations ARDC agreed tocontinue in its lending operations to support and give priority to other BankGroup projects, particularly in the lesser developed States.

B. Detailed Features

Minor Irrigation

4.02 Minor irrigation loans would be made to individual farmers or groupsof farmers. Investments would include open dugwells and shallow tubewells.Wells would be equipped with either electric or diesel powered pumpsets.Typically, these would be 3 to 5 hp units for dugwells and shallow tubewells.The cost of typical installations would be Rs 9,500 for a d-ugwell and pumpset,and Rs 9,000 for a fully equipped shallow tubewell. Locally constructedpumping units, such as Persian wheels, would also be financed. The numbersof each type of investment cannot be estimated accurately at this time andwill depend on individual farmer's preferences and the groundwater environ-ment. On the basis of experience under ARDC I, however, it would appear thatabout 350,000 minor irrigation units would be installed that would provideeither primary or supplemental irrigation water to a total of about 0.9 Mha. A considerable number of pumpsets are due for replacement during thenext few years and in order to assess the magnitude of such replacements,

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ARDC would carry out a survey of probable pumpset replacement requirementsover the next five years and the most appropriate means of financing them,such data would be available by December 31, 1978. This was agreed duringnegotiations. Well construction would present few problems as, in addition topublic sector corporations established for this purpose in each State, thereare many private contractors skilled in and equipped for this work. Electricand diesel pumpset supplies are satisfactory and should pose no constraints todevelopment. Adequate spare parts and good servicing facilities are available.To obtain maximum benefits from minor and surface irrigation, some farmerswould also be granted loans for on-farm developments such as land leveling,bunding, field drainage, and realignment of field boundaries.

4.03 Participating banks would make, and ARDC would refinance, loans toState Electricity Boards for spur lines and associated equipment needed toprovide power to areas in which minor irrigation schemes are being developed.The average cost of step-down transformer, low voltage cable and 11 kv spurline is estimated at Rs 4,500 per pumpset. During negotiations it was agreedthat ARDC would finance these loans from its own resources. The Rural Electri-fication Corporation is, in time, expected to take over this type of financing.

4.04 Loans for deep tubewells each of which would provide water suffi-cient for several farmers and command between 20 and 100 ha would be madeto groups of farmers, cooperatives and State Corporations. The costs ofsuch an installation are about Rs 150,000. Many States have public sectorcorporations that own and operate such equipment and sell irrigation waterto farmers. Similar arrangements would be employed for large capacitypumps for irrigation from rivers and other surface water sources.

4.05 Areas where the risk of over-exploitation of water resources ishigh have been delineated by the GOI Central Groundwater Board (CGWB) andare listed in Schedule A. Minimum spacing between wells is essential toavoid over-exploitation of the groundwater resources and interference betweenindividual water users. Guidelines for minimum spacing and permissible den-sity of wells are given in Schedule B. These criteria would be applied in thecase of all minor irrigation financed under the project. These restrictions,however, are not a deterrent to farmers who can use their own resources toinstall wells since there is no legislation controlling groundwater exploit-ation. During negotiations it was agreed that GOI and ARDC would continue toencourage State Governments to regulate groundwater exploitation by enactingsuitable legislation. Under the project, finance would not be providedfor investments in the Schedule A areas unless the State Government concernedhad either instituted controls acceptable to ARDC over sinking new wells inthese areas, or had carried out studies satisfactory to ARDC that indicatedthat such areas could be rescheduled. Under the project, ARDC itself wouldcarry out a study on a sample basis, under Terms of Reference acceptable toIDA, of the scheduled areas to refine its knowledge of the groundwater situ-ation and the potential for minor irrigation investment; such study would becompleted by December 31, 1978. This was agreed during negotiations.

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Diversified Lending

4.06 Diversified lending would include a range of horticultural, live-stock and fisheries activities. Details of these are given in Annex 5. Manyof these activities have been the subject of State oriented Bank Group financedprojects under which technologies and lending techniques have been proven. Ex-amples are dairy development projects (Credit 482, 521 and 522-IN), the DroughtProne Areas Project (Credit 526-IN), and market development projects financedunder Credits 294 and 378-IN. Under ARDC I, about 7% of the IDA credit wasallotted for diversified lending. Under this project, the proportion would beincreased to about 12% reflecting the increasing demand for finance for theseactivities. Dairy loans would cover the costs of dairy cattle and equipmentneeded by farmers wishing to participate in dairy enterprises that are so suc-cessful in India. A typical investment, costing about Rs 5,600 would coverthe facilities for and the purchase of two dairy cows. Poultry loans wouldbe made to groups as well as individuals. A typical group or cooperative in-vestment would be a 1,000 layer battery unit costing about Rs 60,000. Forsmall and marginal farmers many of whom would be participants in Small FarmersDevelopment Agencies (SFDA) sponsored programs, a typical investment would befor a 50 layer unit costing about Rs 3,000. Fisheries loans would be mainlyin the marine fisheries sector and be both for the purchase of mechanizedvessels and traditional canoes. The typical mechanized vessel is an 11 mtrawler cum gillnetter costing, including gear, about Rs 140,000. Loans tosmall, traditional fishermen would be for the purchase of canoes, average costRs 15,000, and outboard motors, average cost about Rs 5,600. Most tree croploans would be for the rehabilitation of existing plantings. Typically, loanbeneficiaries would make investments in soil preparation, planting materials,and provision of irrigation, where needed. The principal crops involved wouldbe coconuts, tea, coffee, mangoes and citrus fruits. Investment cost is esti-mated to average Rs 5,000 per ha but this would vary according to the cropand the region, as would the loan repayment period, which would not, however,exceed fifteen years. Small, medium and large farmers would all be involvedin this type of investment. Storage, Markets, Farm Equipment: There is anincreasing need in India for storage to cope with the substantial increasein the production of foodgrain and other crops to which IDA is contributingthrough this and other on-going IDA agricultural credits. ARDC would providerefinance to CB against loans given by them mainly to private entrepreneursfor construction of godowns. Godowns would range in capacity from 2,500 to5,000 tons and cost (including land) about Rs 400,000 and Rs 800,000 respec-tively. Under curcurrent arrangements, the Food Corporation of India (FCI)leases such godowns for a minimum period of 3 to 5 years using them for thestorage of buffer stocks and for distribution of foodgrains to the public. Itis essential that ARDC lending for storage be linked with GOI national storageplans for which Bank Group financial assistance is under consideration. Con-sequently, proposals for lending for storage would be referred to IDA beforebeing sanctioned by ARDC. There is also some demand for ARDC refinancing ofinvestments in regulated market yards. As yet, IDA has insufficient experiencewith the two on-going state market development projects. In particular theeconomic benefits are as yet uncertain, although financial returns are veryhigh. Therefore, proposals for markets would also be referred to IDA for

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approval before being sanctioned by ARDC. There is an increasing awarenessof the advantages of small threshers and dryers, which would not cause labordisplacement, to avoid spoilage and other losses at harvest time, particularlyin those areas subject to adverse harvest weather conditions. Under the proj-ect, ARDC would encourage such investments by promoting them in the schemesfor minor irrigation and other developments which it is refinancing.

Training (Annex 6)

4.07 The project would continue and expand training programs for: (i)senior and middle level staff of the main agricultural lending institutions;and (ii) LDB junior staff. At appraisal of ARDC I it was estimated thatabout 6,600 agricultural credit banking senior and middle level staff wouldrequire in-service training. About 25% of these will have received suchtraining by the closing date of ARDC I (December 31, 1977) if current schedulesare met. By December 31, 1979, estimated completion date of the proposedproject, this should have risen to about 45%. This rate of progress is satis-factory given that banks have difficulties in releasing staff for trainingduring busy periods. A study of LDB junior level staff training requirementsconducted by ARDC as part of ARDC I indicated that all the junior staff of LDB,some 17,500 in all, required training and that the training of about 9,000staff in special categories such as technical and recovery officers should begiven priority. All staff in the priority category are expected to have hadthis training by completion of ARDC I, and the remainder would receive it underthe project. Details are in Annex 6. Present training arrangements and qualityof training are generally satisfactory. ARDC is aware that deficiencies haveexisted, and in some instances, still exist in the training program - mainlythe lack of training materials at the LDB training centers. ARDC is adequatelystaffed, however, to direct and monitor training programs and implement remedialmeasures when problems arise. The primary training center would continue tobe the College of Agricultural Banking (CAB) at Poona. The LDB trainingcenters, which would handle the bulk of the junior level training, would berequired to meet ARDC standards for the curricula and for staff experience andquality. Details of the courses are in Annex 6. An assurance was obtainedfrom ARDC at negotiations that it would carefully monitor the training programsand particularly the workshops for trainers, and revise training programs inthe light of its evaluations.

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V. COST ESTIMATES AND FINANCING

A. Cost Estimates

5.01 Project costs are estimated at Rs 5,247 M (US$583 M) of which aboutUS$26 M are duties and taxes. The costs are summarized below:

ForeignLocal Foreign Total Local Foreign Total Exchange--------- (Rs M)--------- -----(US$ M)--------- (%)

I. Minor IrrigationMinor Irrigation 3,018.0 412.0 3,430.0 335.3 45.8 381.1 12Land Development 110.0 6.0 116.0 12.2 0.7 12.9 5

Subtotal 3,128.0 418.0 3,546.0 347.5 46.5 394.0 12

II. DiversifiedLending

Plantation andHorticulture 218.0 24.0 242.0 24.2 2.7 26.9 10

Dairy 194.0 22.0 216.0 21.6 2.4 24.0 10Poultry and

Sheep 117.0 13.0 130.0 13.0 1.4 14.4 10Fisheries 81.0 9.0 90.0 9.0 1.0 10.0 10Farm Mechanization 290.0 97.0 387.0 32.2 10.8 43.0 25Other 94.0 10.0 104.0 10.5 1.1 11.6 10

Subtotal 994.0 175.0 1,169.0 110.5 19.4 129.9 15

III. Training 18.0 - 18.0 2.0 - 2.0 -

Total beforeContingencies 4,140.0 593.0 4,733.0 460.0 65.9 525.9 13

IV. Price Contingen-cies 450.0 64.0 514.0 50.0 7.1 57.1 13

Total ProjectCost 4,590.0 657.0 5,247.0 510.0 73.0 583.0 13

Estimates are expressed in current prices and incorporate a price increasecontingency at an annual rate of 7% in accordance with Bank estimates offuture price movements in India. Cost estimates are based on the ARDC indi-cative lending program for the period 1977/78 to 1978/79 which is drawn fromestimates of agricultural investments requiring ARDC refinance, prepared forthe various States. ARDC has had long experience with investments of the typeto be financed under the project and their costs; this is a two-year time sliceof ARDC estimated five year program (excluding on-going IDA projects channelledthrough ARDC) and as with most agricultural credit projects, no allowance hasbeen made for physical contingencies. Details of project costs are in Annex 12.

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B. Proposed Financing

5.02 Financing would be as follows:

Borrowers Banks ARDC/GOI IDA TotalUS$M % US$M % US$M % US$M % US$M %

MinorIrrigation 26.3 6 30.1 7 205.4 /a 47 175.0 40 436.8 100

DiversifiedLending 11.6 8 24.7 17 83.9 /a 58 24.0 17 144.2 100

Trainingand Survey - - - - 1.0 /b 50 1.0 50 2.0 100

Total 37.9 7 54.8 9 290.3 50 200.0 34 583.0 100

/a ARDClb GOI

5.03 The proposed IDA credit of US$200 M would be made to GOI on standardterms, and would finance about 34% of total project costs or about 36% of proj-ect costs net of duties and taxes. The credit would cover the foreign exchangecosts of about US$73 M and about US$127 M (25%) of local costs. About 50% ofproject costs would be provided by ARDC and GOI, 9% by participating banks,and 7% by borrowers. A Subsidiary Agreement, satisfactory to IDA, would beexecuted between GOI and ARDC, under which GOI would make: (i) US$1 M of theIDA proceeds available to ARDC, as a grant for LDB staff training and for agroundwater survey; and (ii) US$199 M available to ARDC, repayable partlyover 9 years at 6.75% and partly over 15 years at 7.25% (with 0.25% rebate forprompt repayments of principal and interest) depending upon the repaymentperiod of ARDC refinance to participating banks. GOI would bear the foreignexchange risk. It would be a condition of credit effectiveness that GOI andARDC had executed a Subsidiary Agreement satisfactory to IDA.

C. Procurement

5.04 The project would involve relatively small investments on indivi-dual farms throughout India. As in other ARDC operations financed by theBank Group and as is usual in agricultural credit projects financed else-where, project beneficiaries would be given freedom of choice in the procure-ment of equipment, goods and services. Consequently, bulking for Interna-tional Competitive Bidding (ICB) would not be practicable, and ICB wouldnot be used as a means of procurement. Normal commercial channels providean adequate choice of locally manufactured equipment, good servicing facil-ities exist, and prices are competitive with those on world markets.

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D. Disbursement

5.05 The IDA disbursements would be made against ARDC certified state-ments of loans made by participating banks and refinanced by ARDC, and ofexpenditures on training. For ease of administration disbursement of theIDA credit would be made against: (i) 55% of ARDC refinance for minor irri-gation and diversified agricultural lending (excluding tractors, energizationof pumpsets, and forestry schemes which would be financed wholly from ARDCown resources); and (ii) 50% of the cost of training and survey. Documentswould not be submitted to IDA for review, but would be retained by ARDC andbe available for inspection by IDA during project supervision. A schedule ofestimated quarterly disbursements is in Annex 11.

VI. PROJECT ORGANIZATION AND LENDING ARRANGEMENTS

A. Organization

Agricultural Refinance and Development Corporation (ARDC)

6.01 ARDC, a subsidiary of RBI, was established by an Act of Parliamenton July 1, 1963. Its main objective is to provide credit for agriculturalinvestments by making long and medium term funds available mainly to LDB,SCB and CB to refinance approved agricultural schemes which are economicallysound and located within a reasonably compact area. In its development role,ARDC helps formulate schemes, particularly in lesser developed States, andconsequently is able to influence lending policies and procedures of agenciesit assists. It was agreed during negotiations that GOI would advise IDA ofany proposed amendments to the ARDC Act. ARDC would have primary responsi-bility for carrying out the project. Through its refinancing of participatingbanks, it would control the flow of project funds and further contribute tothe sound development of agricultural credit institutions throughout India.

6.02 Organization and Management: The Managing Director (who is thechief executive) is assisted by some 300 professional staff of whom about200 are located at head office in Bombay. The rest are in 15 regionaloffices (Map 12630) located in State capitals where they maintain contactwith State Governments and financing institutions. The regional officesassist lending institutions in project preparation, implementation of ARDCpolicies and procedures, and scrutiny and appraisal of new schemes.

6.03 Source of Funds (Annex 4): Four main sources of funds are availableto ARDC:

(i) Share Capital and Reserves: As of June 30, 1976, issued andpaid-up capital was Rs 250 M and reserves stood at Rs 44 M.The ARDC has no bad debts or overdues, and the reserves areadequate given that most of its lending is guaranteed byState Governments. The principal shareholders are RBI56%, LDB 18%, CB 16% and SCB 9%;

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(ii) Borrowings from GOI: As of June 30, 1976, borrowings fromGOI, representing the rupee counterpart of disbursementsmade on IDA credits, stood at Rs 2,500 M;

(iii) Issue and Sale of Debentures and Bonds Guaranteed by GOI:This source of funds helps mobilize savings from a varietyof institutions, e.g. insurance companies, commercialbanks, etc. During fiscal year 1976, bonds for an aggre-gate amount of Rs 385 M were issued, raising total marketborrowings to Rs 1,377 M; and

(iv) Borrowings from RBI: Borrowings from RBI are of two kinds:(a) for periods not exceeding 15 years under the NationalAgricultural Credit (Long Term Operations) Fund of RBI.Under this arrangement, borrowings reached Rs 600 M during1975/76. Repayments on earlier loans were Rs 98 M, leavinga balance outstanding of Rs 1,384 M as of June 30, 1976;and (b) short term borrowings (less than 18 months); ARDChas a limit of Rs 150 M to accommodate temporary require-ments; as of June 30, 1976, the outstanding balance wasRs 17 M.

6.04 Use of Funds. The major portion of ARDC past refinance has beenfor minor irrigation (75.2%). Other purposes of ARDC refinance include farmmechanization (10.8%), diversified agricultural purposes (8.2%), and landdevelopment (5.8%). Since its inception, ARDC has made significant contri-butions to increased production through financing of about 209,000 tubewells,302,000 dugwells and 481,000 pumpsets. Land developed on irrigation projectsand land improved under soil conservation schemes aggregate about 635,000 ha.Through its investments, ARDC has assisted in bringing about 2 M ha under mul-tiple cropping. Other activities financed under ARDC include developmentof plantation and horticultural crops, poultry, sheep breeding, fisheries,dairy, and construction of storage facilities and market yards. Details arein Annex 4, Table 7.

6.05 Operating Results. ARDC operating results are satisfactory. Pro-fits before taxes in 1975/76 were Rs 58.5 M; with a statutory 10% transferredto reserves (Rs 5.9 M) and taxes of Rs 30.9 M, this left a net profit for dis-tribution of Rs 21.7 M. After paying a share capital dividend of Rs 10.9 M,the balance was added to reserves. From 1975/76 to 1980/81, ARDC loans anddebentures are projected to increase from Rs 5,500 M to Rs 17,000 M, paid upshare capital from Rs 250 M to Rs 650 M and reserves from Rs 44 M to Rs 310 M.Projected Balance Sheets to 1980/81 are in Annex 4, Table 10. The ARDC ac-counts for the fiscal year ended June 30, 1976, have been audited and havereceived an unqualified report.

B. Lending Arrangements

Participating Banks

6.06 ARDC would refinance, by way of loans or purchase of special deben-tures, up to 90% of individual loans issued by participating LDB, CB and SCB.

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Participating banks would compete for project business: there would be nospecific allocations of funds between them. To be eligible to participate,LDB would have to meet the overdues criteria mentioned in para 2.15 and SCBwould have to have a recovery rate of not less than 75% of demand. All CB,which are regulated by RBI, would be eligible.

6.07 Appraisal of Schemes. The ARDC lending program is implementedthrough a large number of area schemes. Under each scheme, credit is pro-vided for one particular type of investment, for example, pumpsets or dairycattle, within a compact area. Initiation and formulation of the scheme isnormally by local banks in cooperation with State Government agencies. Inlesser developed States, however, ARDC frequently assists with scheme formu-lation and preparation. Schemes are then submitted to ARDC for appraisaland approval of refinance. Appraisal covers not only technical and financialfeasibility, but also an assessment of the administrative and organizationalcapacity of supporting institutions, including extension, input supply andseasonal credit. Where necessary, time-scheduled undertakings are obtainedthat services and institutions will be brought up to required standards.Technical appraisal is conducted by ARDC specialist staff supplemented byconsultants of which ARDC maintains a large panel. Under the first lineof credit, ARDC built up a satisfactory technical capacity for most ground-water development schemes which account for a large part of on lending oper-ations. However, for appraisal and supervision of lift irrigation and deeptubewell schemes, ARDC needs additional technical expertise and an assurancewas obtained from ARDC at negotiations that a person whose qualificationsand experience are appropriate would be employed by ARDC as a permanent staffmember by not later than August 31, 1977.

6.08 Following scheme appraisal, a report is prepared for approval byARDC Board of Directors. However, if the total refinance requested amountsto Rs 5 M or less, the scheme may be approved by the Managing Director. Theperiod of time between receipt of scheme application and approval depends onstandards of preparation and type of investment but normally averages about6 months. Following approval, the terms and conditions of refinance areformally communicated to participating banks. ARDC appraisal procedures andstandards, which have gradually evolved and improved over the eight years inwhich it has been associated with the Bank Group, are satisfactory.

Lending Terms

6.09 Interest Rates. Generally, the structure of interest rates in Indiais considered to be adequate. There is little inter-sectoral distortion: thedifferentials charged by institutions lending primarily to agriculture andthose lending to industry are small. In general, institutions lend to industryat between 11% and 12%, and commercial banks for agricultural purposes at about13% when using their own funds. Under this project, participating banks,including commercial banks, would receive funds from ARDC at minimum annualinterest rates of 7.5% for minor irrigation and on-farm development, and 8% fordiversified agricultural lending. Final beneficiaries would borrow at minimumrates of 10.5% for minor irrigation and on-farm development, and 11% for otheragricultural purposes. Under the project, ARDC would ensure that interestrates charged on loans would be sufficient to enable ARDC and participatingbanks to:

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(i) cover all operating expenditures and charges, including taxes (if any),and interest payments on borrowings; and (ii) maintain adequate provisionsfor bad debts and adequate general reserves. While interest rates are gen-erally adequate to cover the costs of lending operations, most LDB would be-nefit from an increased "spread" to allow continued expansion of operationsmeeting the needs of small farmers and in the interest of long term financialviability. This would also enable direct recruitment of permanent senior staffto replace staff now on secondment from the State Governments (para 2.16).Such a move would strengthen LDB. It was agreed during negotiations that ARDC,in conjunction with RBI, would carry out a study of interest spreads withparticular reference to the needs of LDB; such study would be completed byMarch 31, 1978. Interest rates in India are discussed in Annex 3 Appendix 4,and project lending terms and conditions are detailed in Schedule C.

6.10 Security. Security would be in accordance with arrangements betweenARDC and participating banks. CB secure medium and long term loans by dis-cretionary first mortgages on land, chattel mortgages, guarantees, or otheracceptable securities. In most States, LDB are required by law to obtain afirst mortgage on land for all loans, and in most cases they also take a lienon any equipment purchased with loans. If LDB lend a farmer more than 60% ofthe value of his land, a State Government guarantee of the loan is required;this has been readily forthcoming when necessary.

6.11 Borrowers' Contribution to Investment Cost and Repayments. Underthe project, the minimum contribution of a borrower with pre-development in-come between Rs 2,000 and Rs 3,500 (based on 1972 prices) would be 10% 1/ ofinvestment costs. For farmers with pre-development incomes exceeding Rs 3,500,the minimum contribution would be 10% 1/ of investment costs for minor irriga-tion and land development and 15% 2/ for other investments. For small farmers(defined in Schedule D), the contribution would be 5% for all lending. Bor-rowers' contributions would include the value of any family labor applied tothe investment, as estimated by the lending bank. For loans from LDB, thedown payment would include a mandatory 5% contribution to the share capitalof the LDB. Repayment periods would not exceed the life of assets financed.For pumpsets these would be for a maximum of seven years; for tubewells,fifteen years for loans to small farmers, and nine years maximum for otherfarmers. For other agricultural lending, the repayment periods would con-form to the farmer's ability to repay, with a maximum of fifteen years. Wherenecessary, grace periods would be allowed.

1/ 7% for two or more farmers in a group loan.

2/ 10% for two or more farmers in a group loan.

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C. Accounts and Audit

6.12 Accounting and auditing procedures would be as in other on-goingBank Group financed agricultural credit projects in India. Under these,audited accounts of participating banks are submitted through ARDC to IDAwithin four months of the end of the fiscal year, together with a statement,certified by ARDC, showing lending and recoveries under the project. CBaccounts are audited by commercial accounting firms and scrutinized by RBI;LDB accounts are audited by an audit section of the State cooperative depart-ment. These audit procedures are satisfactory and audits under on-goingprojects are up to date. ARDC would continue to have its accounts audited byauditors acceptable to IDA. Assurances on these points were obtained fromARDC during negotiations.

D. Lending to Small Farmers and in Lesser Developed States

6.13 Small Farmers. ARDC and GOI agreed during negotiation that at leastUS$100 M (50%) of the total amount of loans made available to beneficiariesunder the project would be disbursed to small farmers. ARDC confirmed thatrecords would continue to be kept to clearly identify such lending. ARDCdefines a small farmer (see Schedule D) as one who is cultivating land thatproduces, before any improvements are made, a maximum annual net return tothe farm family of Rs 2,000, based on 1972 prices. Assuming that the farmfamily has no other income, this is equivalent to an annual per capita incomeof about US$50. 1/ Under ARDC I, disbursements to small farmers thus definedare running at about 55% of total disbursements. To facilitate lending tosmall farmers, ARDC, participating banks, State Governments, and GOI haveinstituted a number of concessions. These include: (i) reducing down payments,and, where necessary, permitting these to be spread over two years rather thanpaid in one installment; (ii) special terms for participants in groups; (iii)relaxation of land mortgage requirements and provision of a State Governmentguarantee in lieu; and (iv) facilities for liberalizing debenture issues incases where a participating bank has a major small farmer program and incursspecial costs through, for example, justifiable deferral of down payments andloan repayments. Furthermore, GOI and some States make capital grants avail-able to small farmers and entrepreneurs. The largest of such programs is thatoperated by the Small Farmers Development Agencies (SFDA) (Annex 7).

1/ While such farmers are very poor, they are not always the poorest ruralpeople. The latter are mostly landless laborers. They benefit indirectlyfrom ARDC minor irrigation operations as a result of the improved on-farmemployment opportunities resulting from intensification of land use.They also benefit directly from certain diversified lending operations.

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6.14 It is proposed that, under the project, ARDC refinancing of loansmade to participants in SFDA and other capital grant schemes would be eligiblefor IDA finance provided IDA was able to reach agreement with GOI on the fol-lowing points:

(i) use of a maximum of 2 ha of dry land or 1 ha of irrigatedland 1/ (or the ARDC small farmer definition, whichever islower) as the upper limit for allowing refinance of parti-cipants in SFDA under the Project: this would ensure thatonly genuinely small farmers refinanced by ARDC under theIDA credit have access to the capital subsidy; and

(ii) subsidy funds granted by SFDA in connection with ARDC sub-loans would be channeled through the banking system, farmereligibility criteria agreed with IDA would be observed, andsuitable field supervision and auditing procedures would befollowed: this would ensure that subsidy funds allocatedwithin ARDC-financed schemes would be adequately administered.

During negotiations GOI confirmed that the above arrangements would be applied.

6.15 Lesser Developed States. The north eastern region of India, com-prising the States of Assam, Bihar, Orissa and West Bengal is an area whereagricultural development lags. Yet most of the region enjoys moderate toheavy monsoon rains and large areas of relatively fertile soils, and there isa vast, mainly unexploited, surface and groundwater resource. ARDC has re-cognized the need to increase lending levels in these and other lesser de-veloped States and has participated with IDA in review of their potentials.Under the project, a minimum of 25% of ARDC refinancing is expected to bedisbursed in lesser developed regions which, in addition to lesser developedareas in the north eastern region States, include parts of Himachal Pradesh,Rajasthan and Jammu and Kashmir. Annex 12 shows ARDC plans for State by Statelending. As noted in para 7.01, lending in many of those States would befacilitated by on-going or proposed IDA financed projects directed at improvingagriculture research, extension and other supporting agricultural institutions.

E. Monitoring, Evaluation and Reporting

6.16 Monitoring. Reports from participating banks and field supervisionsby ARDC termed "follow-up" studies are the main sources of information on the

1/ This is the SFDA small farmer definition; the ARDC definition is shownin Schedule D. The main difference between them is that the ARDC defini-tion is based on a minimum income which is then converted into ha atDistrict level and the SFDA definition relates to a fixed ha level. Formost cropping patterns and in most States, the SFDA definition is con-siderably more restrictive than the ARDC definition, i.e. it is targetedat a lower farm size. Thus, the bulk of SFDA small farmers also qualifyas small farmers under the ARDC definition.

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progress of ARDC refinanced schemes. During the project period several hundredschemes per annum would be inspected by ARDC and several thousand beneficiariesvisited. ARDC intends to improve the efficiency of its scheme supervisionthrough: (i) clearer guidelines for the selection of schemes for supervisionand of beneficiaries for interview; (ii) standardization of data collection;and (iii) refinement, reduction and timely analysis of data collected.

6.17 Evaluation. An improved evaluation system is needed to provide ARDCwith better data on costs, benefits and financial viability at farm level ofthe main investments it refinances. ARDC plans to evaluate ten ARDC schemesand participate in evaluation of ten completed IDA financed agricultural creditprojects during the project period. At the same time a major effort would bemade to develop more suitable evaluation methodology through the establishmentof an Evaluation Task Unit consisting of 3-4 senior staff who would dedicatetheir full time to that purpose. The possibility of coordinated evaluationefforts of different agencies, including ARDC, at the State level would be ex-plored through the establishment, in each of an initial five States, of a Co-ordination Committee for Agricultural Surveys and Studies (CCAS), in which theState Government, ARDC, banks, and universities would participate. In orderto implement this program ARDC would provide each of its regional officeswith an agricultural economist.

6.18 Reporting. ARDC would send quarterly and annual progress reportsto IDA using guidelines set out in Annex 8.

6.19 Assurances were obtained during negotiations that ARDC would: (i)follow monitoring, evaluation and reporting procedures as agreed with IDA;(ii) establish an Evaluation Task Unit satisfactory to IDA by December 31,1977; (iii) conduct ten evaluation studies; the type of investments, locationof study and methodology to be agreed by IDA; and (iv) provide all regionaloffices with an agricultural economist by December 31, 1977.

VII. PRODUCTION, MARKETING, PRICES, AND FINANCIALRETURNS TO PROJECT BENEFICIARIES

Production

7.01 About 0.9 M ha would be irrigated as a result of project financed in-vestments in minor irrigation and land development and, as a consequence bene-ficiary farmers would increase cropping intensities, yields, and the proportionof high value crops in their rotations. These changes would be facilitated andsupported in several States by improvements in extension and agricultural re-search services many of which are taking place with IDA assistance. 1/ Project

1/ IDA has financed the reorganization of extension and research servicesin Orissa and West Bengal, appraised such projects for Rajasthan, MadhyaPradesh and Assam, and is assisting in the preparation of similar proj-ects for Uttar Pradesh and Bihar.

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induced annual incremental production from minor irrigation at full develop-ment, is estimated as follows: (i) about 700,000 tons of foodgrains (about0.6% of production in 1975/76); (ii) about 800,000 tons of potatoes and othervegetables; and (iii) sugarcane, groundnuts and fibercrops valued at aboutRs 1,300 M (US$144 M). Total value of this output is estimated at Rs 2,500 M(US$278 M) at constant end of 1976 farm-gate values.

7.02 Diversified lending would lead to production increments from treecrops, for example - coconuts, coffee and tea, livestock - milk, eggs andwool, and fisheries - fish and shrimps. Part of this production, for ex-ample, coffee and shrimp, would be exported. The value of incremental out-put resulting from diversified project lending, at full development, isestimated at about Rs 800 M (US$89 M) per annum, at 1976 farm-gate prices.

Marketing

7.03 Most incremental production would be of domestically consumed pro-duce such as foodgrain, vegetables and livestock products, for which demand isgood and expected to rise as a result of population increase. Export marketprospects for items such as shrimp, sugar and coffee are good. Marketingdifficulties are not anticipated as incremental output would amount to asmall proportion of present production, would come from numerous and widelydispersed areas throughout India, and could easily be handled by existingmarketing channels.

Prices

7.04 Financial prices used in this report are based on end 1976 farm-gate prices. Prices used in economic analyses are based on Bank projectionsof world prices. Details are in Annexes 9 and 10.

Financial Benefits

7.05 The financial viability of the principal categories of projectinvestments have been tested through the analysis of ten representativemodels. The financial rates of return (FRR) and incremental benefits aresummarized below:

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Annual IncrementalIncome After Debt

Model Area (Size) Rs FRR Service(%) (Rs)

1. Dugwell and pumpset 1.2 ha 9,500 26 1,6502. Shallow tubewell 2.0 ha 9,000 41 2,7503. Pumpset (3 hp) 1.2 ha 3,500 38 9904. Pumpset (3 hp) 2.0 ha 3,500 43 1,1705. Land development 1.2 ha 2,000 over 50 1,8706. Coconut 0.5 ha 4,100 30 1,5007. Dairy 2 cows 5,600 over 50 1,4108. Poultry 1,000 layers 60,000 26 5,7009. Mechanized fishing

vessel 11 m. 140,500 33 17,70010. Mechanized canoe 9 m. 31,400 30 2,900

7.06 These rates of return are only illustrative, but they show thatproposed project investments would be attractive to sub-borrowers and thatdemand for investment funds provided by ARDC is likely to remain strong.However, it must be recognized that as ARDC operations expand to reach smal-ler farmers, particularly in lesser developed areas, financial returns maynot always be as attractive as indicated by these averages. In particular,effective extension and provision of modern inputs and improved water sharingamong small farmers is often a prerequisite to profitable minor irrigationinvestment. Thus, continued expansion of sound ARDC lending operations issubstantially dependent on the development of such complementary servicespromoted under a variety of GOI programs, often under the support of BankGroup projects.

VIII. ECONOMIC BENEFITS AND JUSTIFICATION

8.01 The project's primary economic benefits would be an increase inagricultural production for domestic consumption and export. At full develop-ment, by about 1984, the annual value of such increases is estimated at aboutUS$367 M in terms of 1976 prices, see paras 7.01 and 7.02.

8.02 Economic rates of return have been calculated for the investmentmodels used in the financial analysis of the project, para 7.05. Based, asthey are, on the experience gained under on-going ARDC schemes they can beregarded as indicative of the rates of return which would accrue. Resultsof the calculations which are summarized in the following table indicatethat the overall economic return of the project would be about 32%.

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Economic Rate of ReturnBest Investment Operational Benefits

Estimate + 10% Costs + 10% -10%

1. Dugwell and pumpset 27 24 24 20

2. Shallow tubewell 41 37 36 323. Pumpset (1.2 ha) 35 31 30 264. Pumpset (2.0 ha) 32 28 26 225. Land development over 50 over 50 over 50 over 506. Coconut 22 20 21 197. Dairy 39 32 24 178. Poultry 23 20 10 79. Mechanized fishing

vessel 39 34 32 2710. Mechanized canoe 34 29 24 19

8.03 Beyond the realization of substantial benefits arising out of pro-ductive on-farm investments, the project aims at the build-up of strongerinstitutions. Strengthening of the ARDC technical units and improvements inthe Corporation's monitoring and evaluation systems should result in betterpreparation, appraisal and monitoring of schemes, thus reducing investmentrisks. Strengthening of LDB through intensified staff training would havea similar impact. Measures to better control overdues through tying theissuance of new debentures to recovery performance should lead to furtherreduction in LDB overdues and thus increase the availability of funds forinvestments and contribute to a more equitable distribution of productiveassets in the countryside.

8.04 The number of project beneficiaries would be substantial and isestimated at about 1.0 M farmers; this estimate includes farmers who wouldbenefit through the purchase of water. At least 50% of the credit wouldbe extended to small farmers, see para 6.13 and about 25% of it deployed inthe lesser developed north eastern States of Assam, Bihar, Orissa and WestBengal and parts of other lesser developed States (para 6.15). Incrementalannual employment generated by project investment is estimated at about 175 Mman-days. Much of the additional labor would be supplied by unemployed orunderemployed members of beneficiary families. However, a significant partwould be provided by hired laborers, many of them landless people belongingto the poorest segments of India's population.

8.05 Project Risk. The main risk in this type of project is inadequateappraisal and monitoring of schemes and individual borrowers, leading to poorperformance of some investments and borrowers. ARDC experience shows thatthis risk is slight, and continuing institutional improvement should furtherreduce it. The vagaries of weather are an omnipresent risk, but with about75% of project investments planned for minor irrigation, the project by itsature is risk reducing.

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IX. AGREEMENTS REACHED AND RECOMMENDATIONS

9.01 During negotiations agreement was reached on the following points:

(a) ARDC would apply agreed regulations for the issuance of LDBdebentures, and any modifications would be subject to IDAapproval (para 2.15);

(b) ARDC would continue in its lending operations to support andgive priority to other Bank Group projects (para 4.01);

(c) ARDC would carry out a survey of probable pumpset replacementrequirements for the next five years (para 4.02);

(d) ARDC would carry out a study of groundwater problem areas(para 4.05);

(e) ARDC, in conjunction with RBI, would carry out a study ofinterest spreads with particular reference to the needs ofLDB (para 6.09);

(f) at least US$100 M (50%) of the total amount of loans madeavailable to beneficiaries under the project would be dis-bursed to small farmers (para 6.13); and

(g) ARDC would follow monitoring, evaluation and reportingprocedures as agreed with IDA (para 6.19).

9.02 A condition of effectiveness would be that:

(a) a Subsidiary Agreement between GOI and ARDC, acceptable toIDA, had been executed (para 5.03).

9.03 Subject to these agreements, the project is suitable for an IDAcredit of US$200 M on standard terms. The Borrower would be the Governmentof India.

May 12, 1977

INDIA


Groundwater Utilization

Districts Containing Intensively Developed and/or Potential Problem Areas

State District Tehsil/Taluk State District Tehsil/Taluk

Gujarat Ahmedabad Daues Haryana Hissar BarwalaViramgam Hansi-I

SirsaBanaskantha Deodar Jind Rajannd

DeesaDhanera Karnal Assandh

MadlaudaJunagadh Mangrol Missang

Veraval NilokheriPanipat

Kutch Anjar SamalkaBachanLakhpet Kurukshetra GulhaMundra LadwaNaliya PundriRapar Sahabad

ThanesarMehsana Mehsana

Patan Mohindergarh AtalinangalVijapur Bawal

KholHaryana Ambala Barara Khanina

Jagadhari NarnaulNaraingarh Nangal-Chowdri

Rewari >

0.

I -atbm

State District Tehsil/Taluk State District Tehsil

Bhiwani Bhadra Rohtak BahadurgarhBhiwani BeriDadri I JhajjarDadri II KharkhoderDadri II KalanaurLoharu Nahar

RohtakGurgaon Balabhgarh Shalawas

GurgaonHathin Sonepet GanaurNuh RaiPataudi SonipatPunhanaSohana Maharashtra Ahmednagar Akola

RahuriKarnataka Bangalore Bangalore south Kopargaon

Devanahalli SangamenerDoddaballapurHoskote Dhulia Dhulia

NandurbarBelgaum Attani

Chikodi Nasik ChandurGokak KalwanHukkeri MalegaonRaibagh Satana

Bellary Harpanahalli Sangli KhanapurMallapur Miraj

Bijapur B. Bagewadi Orissa Ganjam Aska-BlockBijapurIndi Punjab Faridkot NilsinghwalaJamkhandi Moga and southernMudhol parts of JagraonSindgi d

(D o9 5D


Chitradurga Challakere Kapurthala West Entire district except

Chitradurga 5 km. wide belt along

Hiriyur river BeasJagalurMolakalmuri Ludhiana Complete district

except in the block

Dharwar Mundargi along river Sutlej

Kolar Bagepalli Patiala Parts of Nabha and

Bangarpet Sirhind Tehsil, SamanaChikkaballapurChintamani Sangrur Complete district

Gudibanda except in the southern

Kolar part of Sangrur tehsil

Malur and western part of

Mulbagal Barnala tehsilSidlaghatta

Barmer Entire district except

Mandya Mandya Siwana blockPandavapurSrirangapattana Ganganagar Excepting the eastern

parts and areas

Mysore Yelandur adjacent to canals

Raichur Koppal Jaisalmer Whole district exceptingareas south of

Tumkur Bavagada JaisalmerKoratagereMadhugiri Jalore Entire districtSira

Jodhpur Jodhpur-Nathania area

Pali Entire district

t cnrr,D

I-.>


Tamil Nadu Coimbatore Avinashi West Bengal Birbhum BolpurCoimbatore LabhpurPalladam Mayureshwar

MuraraiNorth Arcot Arni Nalhati

Polur RampurhatWandiwash Upper Nanur

Ramanadhapuram Arupukottai Burdwar' KalnaSattur KatwaSrivalliputhur

Hooghly ArambaghSalem Attur Balagarh

Salem GanghatPursurah

Tirunelveli KoilpattiNanguneri Malda Kharba

RatnaUttar Pradesh Aligarh Areas around Aligarh;

Iglas in Iglas Tehsil Murshidabad Bharatpurand Sansi in Hathras BurwanTehsil Kandi

KhargramBadaun Alapur in Datagani

Tehsil and Kisrua Nadia Krishnagar-lin Badaun Tehsil

Bulandehahr Jewar and Rabupura inKhurja Tehsil

Meerut Baraut, ChhaprauliKisanpur Baral andDaha in Baghpat Tehsil

Nidinagar and Pilkhua inGaziabad Tehsil, Kharkhuda,Babugarh and Hapur in IVHapur Tehsil, Bhawanipur 9 =

and Jani-Khurd in M ffMeerut Tehsil 4-

Source: Central Groundwater Board

Schedule BPage 1

INDIA


Criteria for Spacing and Density of Wells

Participating banks and State agencies shall determine, for eachscheme submitted to ARDC involving groundwater development, permissiblespacing and density of wells and anticipated water quality based upon localgeologic and hydrologic conditions. Such determinations shall be reviewedby ARDC prior to sanction of any scheme. In the event any scheme proposesdevelopment exceeding the following guideline criteria, ARDC may sanctionthe scheme only after receipt and approval of additional detailed support-ing data. ARDC shall maintain a record of all requests for relaxation ofthe following criteria, including the supporting data submitted and actiontaken,. for periodic field review by IDA.

A. Well Spacing (minimum spacing in meters)

Aquifer and ----------------Annual Rainfall in mm --------------well type Up to 500 500-1,000 1,000-1,500 Over 1,500

DugwellsWithout pumpset /a 180 m 150 m 110 m 100 mWith pumpset /b 250 m 200 m 150 m 100 m

Tubewells in AlluviumShallow Tubewells /c 275 m 225 m 175 m 150 mDeep Tubewells /d 1,000 m 800 m 600 m 500 m

Tubewells in Sedimentary RocksMedium Tubewells /e 700 m 700 m 700 m 700 m

/a Typical annual withdrawal 5-6,000 m3

/b Typical annual withdrawal 10-12,000 mi

/c Typical annual withdrawal 15-25,000 m3 at 25-40 m /hr

/d Typical annual withdrawal 300-400,000 m3 at 150-200 m3/hr

/e Typical annual withdrawal 75-125,000 m 3at 75-100- m /hr

32

Schedule BPage 2

(Before reducing above spacing criteria, consideration must be given tosuch factors as: rainfall seasonal distribution, reliability, and intensity;cropping pattern and water requirements, reliability and intensity; croppingpattern and water requirement; local geology, soils, and topography; existingdevelopment and historical water-level observation or aquifer tests; proposedwithdrawal rates and volumes; and potential added private developments).

B. Well Density

Permissible density of wells to be based upon a water-balance studyof the appropriate elemental area, considering all existing development andpotential concurrent private development, and using actual field data when-ever possible instead of empirical assumptions.

33

Schedule CPage 1

INDIA


Agricultural Refinance and Development Corporation

Project Lending Terms and Conditions

The following lending terms and conditions would be used in imple-menting the project and would not be altered without prior IDA agreement:

1. GOI to ARDC

(a) For ARDC refinancing up to 9 years:

(i) annual interest rate of 6.75% minimum, less 0.25%for prompt payment;

(ii) repayment at the end of 9 years.

(b) For ARDC refinancing for more than 9 and up to 15 years:

(i) annual interest rate of 7.25% minimum, less 0.25%for prompt payment;

(ii) repayment at the end of 15 years.

(c) GOI to carry exchange risk.

2. ARDC to Lending Banks

(a) Annual interest rate of 7.5% minimum for minor irrigationschemes (including on farm development);

(b) Annual interest rate of 8.0% minimum for diversifiedlending;

(c) Installment repayments to coincide approximately withcollections from ultimate borrowers; and

(d) Refinancing by purchase of debentures or by loans upto 90% of individual loans.

34

Schedule CPage 2

3. Lending Banks to Ultimate Borrowers

(I) Minor Irrigation and On Farm Development:

(a) Annual interest rate of 10.5% minimum;

(b) A once and for all evaluation fee of 0.5% of thecost of project investment may be charged;

(c) Farmer's contributions (including obligatory purchaseof LDB shares, own labor, and other contributionsin cash or kind);

(i) for lending to small farmers, a minimum of 5%for the cost of any investment;

(ii) for farmers cultivating land providing a pre-development net return to family resourcesranging from Rs 2,001 to Rs 3,500 based on1972 prices, a minimum of 10% 1/ of theinvestment cost; and

(iii) for other farmers, a minimum of 10% 1/ of thecost of pumpsets and 15% 2/ for other minorirrigation and on-farm development investments.

(d) Repayment periods to be based on the ultimate borrower'srepayment capacity, and life of assets to be purchased,but not to exceed:

(i) for normal lending:

(1) 7 years on loans for pumpsets, whetherfinanced as separate loans or includedin other minor irrigation loans; and

(2) 9 years on loans for minor irrigationand on farm development loans, otherthan pumpsets;

(ii) for lending to small farmers:

(1) 7 years on loans for pumpsets, whether

financed as separate loans or includedin other minor irrigations; and

1/ 7% for two or more farmers in a group loan.2/ 10% for two or more farmers in a group loan.

35

Schedule CPage 3

(2) 15 years for all other minor irrigationand on farm development loans;

(e) Grace periods not exceeding 23 months from the date ofthe first installment of the loans, except in exceptionalcircumstances, may be granted at the discretion of ARDC,provided that the repayment period of such loans is notexceeded.

(f) Technical standards, in particular criteria for spacingand density of wells as laid down in Schedule B to beobserved. For lift irrigation schemes, a careful determin-ation of water availability would be made. In evaluatingwater supply attention would be given to net depletionresulting from recent and future groundwater developmentsand the effect this would have on the base flow of thestream.

(g) IDA funds to be withheld from problem areas identifiedin Schedule A unless the State Government concerned haseither instituted acceptable controls over the sinkingof new wells or has carried out further studies provingthat there is no longer a problem in those areas and,that such areas could, at the discretion of ARDC beremoved from the problem list. ARDC would maintain a fileof such studies at head office for IDA inspection.

(h) If his cultivated area was significantly smaller than thatwhich could be adequately irrigated by the tubewell con-cerned, the borrower would undertake to sell water sur-plus to his needs, or to hire out his pumpset, or to par-ticipate with other farmers in the joint investment andoperation of the tubewell.

(i) Corporation or farmers' group borrowing for lift irriga-tion or deep tubewell schemes would operate such schemesin a manner that would ensure adequate water deliveriesto each beneficiary and that would generate sufficientrevenues to cover operating expenses and repay thecapital investment with interest.

II. Diversified Lending:

(a) Annual interest rate of 11% minimum;

(b) A once and for all evaluation fee of 0.5% of the costof investment may be charged;

36

Schedule CPage 4

(c) Farmers' contributions (including obligatory purchaseof LDB shares, own labor, and other contributions incash or kind);

(i) for lending to small farmers, a minimum of 5% ofinvestment cost;

(ii) for farmers cultivating land providing a pre-development net return to family resources rangingfrom Rs 2,001 to.Rs 3,500 based on 1972 prices, aminimum of 10% 1/ of the investment cost; and

(iii) for other farmers, 15% 2/ of the investment cost.

(d) For the purpose of diversified lending, the terms"small farmer" and "farmer" include all beneficia-ries of schemes other than minor irrigation; for thepurpose of determining the equivalent of small farmersand farmers among such beneficiaries, the definitionof small farmer and the description of farmers set outin sub-paragraph (II) hereof shall be adopted to mean'"any person primarily engaged in an activity other thanminor irrigation which provides a pre-development netreturn to family resources not exceeding Rs 2,000" and"ranging from Rs 2,001 to Rs 3,500," respectively. "Netreturn to family resources" shall mean gross family in-come from the activity less costs actually incurred.

(e) Repayment periods to be based on the ultimate borrower'srepayment capacity and life of assets to be purchased,but not to exceed 15 years (including grace periodswhere necessary).

III. General

(a) ARDC and lending banks would maintain separate recordsfor small farmers;

(b) Security would be in accordance with arrangements betweenlending banks and ARDC;

(c) ARDC would refinance only sound sub-projects which, onthe basis of careful study were considered to be financiallyviable, have a minimum financial rate of return of 15%,and backed with satisfactory technical and administra-tive management.

1/ 7% for two or more farmers in a group loan.2/ 10% for two or more farmers in a group loan.

37

Schedule CPage 5

(d) ARDC would forward all applications for refinance ofdiversified lending schemes having total investment costsof US$0.5 M equivalent and over, with appraisal reportsand all other relevant data, to IDA for final approval.

(e) ARDC would apply the agreed criteria relating percentageoverdues to LDB debenture eligibility.

38

Schedule DPage 1

INDIA


Small Farmer Definition

1. "Small Farmer" shall mean any farmer cultivating land providingan annual predevelopment net return to family resources to such farmer andhis family not exceeding Rs 2,000, based on 1972 prices.

2. For the purpose of determining said net return, the followingcriteria shall apply:

(a) "land" shall include all land actually cultivated by thefarmer, notwithstanding the fact that ownership of suchland may vest in one or more persons;

(b) "net return to family resources" shall mean grossfamily income from the land, less costs actuallyincurred (including cash value of farmer's own inputsincluding seed, fertilizer, hired human labor, hiredbullock labor, feed consumed by family bullocks, irriga-tion charges, land revenue, interest on crop loan, andrent on leased land); and

(c) the amounts for the current year shall be arrived at byapplying the current price index of the All-IndiaAgricultural Laborers Index 1/ for the State in whichthe land is located to the amount set forth in para-graph 1 hereto.

39

1/ Source: "Agricultural Situation in India" published by the Directorateof Economics and Statistics, Ministry of Agriculture.

ANNEX IPage 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Bank Group Projects Financed Through ARDC

1. The ARDC has been closely associated with the formulation andimplementation of 25 Bank Group projects. Details of projects are givenbelow and summarized in Table 1.

A. Agricultural Credit Projects

2. The IDA has sanctioned 11 agricultural credit projects to be imple-mented through ARDC in the States of Gujarat, Punjab, Andhra Pradesh, TamilNadu, Karnataka, Uttar Pradesh, Madhya Pradesh, l1aryana, Maharashtra and,West Bengal. The main components of these projects include investments inminor irrigation, land leveling and tractors. The West Bengal project isan integrated one involving minor irrigation, establishment of agro-servicecenters, development of markets, and completion of lift irrigation units.

3. The aggregate lending program for minor irrigation purposes inthe various IDA projects was about Rs 4,530 M of which IDA provided aboutRs 2,630 M. Implementation of minor irrigation programs has proceeded satis-factorily as land development banks (LDBs), the main financing institutions,were familiar with this type of lending. In addition, the shift to a higherlevel of technology in agricultural production also contributed to increaseddemand for minor irrigation investments.

4. Three projects, Gujarat, Maharashtra and Haryana, have been fullydisbursed. The minor irrigation component (after reallocation) has been com-pleted in the Andhra Pradesh and Tamil Nadu projects. In Karnataka, while theoriginal credit allocation for minor irrigation investment has been completed,some credit has been reallocated from land development and/or farm mechaniza-tion to minor irrigation. The revised program is likely to be completedwithin a few months. The projects of Bihar, Uttar Pradesh and Madhya Pradeshare under various stages of implementation. In the West Bengal project, whichwas declared effective during 1975, the banking plan allocating the investmentprogram between participating banks was recently' finalized by ARDC and projectimplementation is expected to gain momentum.

5. The land development program under IDA projects did not initiallyprogress well due to lack of demand by farmers for land leveling loans. Muchof the land leveling work was done by family labor, for which no borrowing wasrequired. Also a legal ceiling on land holdings, difficulties in creation ofmortgages by borrowers in favor of LDB, and inadequate water in canals

40

ANNEX 1Page 2

restricted demand. The demand for minor irrigation investments was very high,however, and consequently, after consultation with GOI and IDA, there was areallocation of funds from the land development component to minor irrigationin the Andhra Pradesh, Tamil Nadu, Maharashtra and Karnataka projects. InHaryana, there was reallocation of credit from farm mechanization to minorirrigation. The position of IDA credit for minor irrigation before and afterreallocations is presented in the following table:

IDA Credit Allocation and Reallocations Under Agricultural Credit Projects(US$ M)

Original IDA IDA CreditCredit Allo- After Reallo-

Name of Project Category cation cation

1. Gujarat M.I. 27.30 32.48F.M. 7.40 2.50Others* 0.30 0.02

35.00 35.00

2. Andhra Pradesh M.I. 14.00 16.32L.D. 5.24 3.04F.M. 4.88 4.79Others* 0.28 0.25

24.40 24.40

3. Haryana M.I. 4.40 12.40F.M. 17.40 12.10(Tractors)Harvesters and Combines 0.50 0.50Spare Parts 2.70

25.00 25.00

4. Maharashtra M.I. 22.68 26.94L.D. 2.72 1.20Others* 4.60 1.86

30.00 30.00

5. Tamil Nadu M.I. 22.70 24.06L.D. 2.10 0.74F.M. 5.00 6.15Others* 5.20 4.05

35.00 35.00

6. Karnataka M.I. 13.10 25.00L.D. 10.00 2.00F.M. 6.70 9.20Others* 10.20 3.80

40.00 40.00

* Other items include procurement of well drilling rigs, earth movingequipment, consultancy services, spare parts, etc.

41

ANNEX IPage 3

6. The agricultural credit projects for Gujarat, Punjab, AndhraPradesh, Tamil Nadu, Haryana and Karnataka had envisaged, inter alia, financ-ing of farm mechanization equipment in particular, tractors. The progress ofdisbursements under this component was halted in the earlier project yearsmainly due to procurement problems of financing domestically made tractors.This issue was resolved by IDA Board action in December 1974, and progress hasbeen quite rapid since then. The closing dates of Haryana, Punjab, Karnataka,Andhra Pradesh and Tamil Nadu projects were extended for this purpose.

B. ARDC I

7. The main objective of this general line of credit, which resultedfrom experience gained by ARDC through successful implementation of theabove mentioned State agricultural credit projects, was to transfer to ARDCappraisal functions formerly done by IDA and for ARDC to commit specificamounts for individual schemes within an IDA-approved overall lending pro-gram. The project, besides replacing the State credit projects, enabledIDA to support worthwhile schemes too small for IDA to appraise individually.

8. The IDA credit amounting to US$75 M supports a two year lendingprogram totaling US$168.5 M, for minor irrigation and diversified lending,throughout India. The credit became effective on August 5, 1975 and projectlending started October 1975. In States where on-going IDA credit projectswere under implementation, financing institutions were already conversantwith project lending; in other States, considerable work was necessary tomake the State Governments and financial institutions aware of projectrequirements.

9. Schemes brought under the project were of three categories:(a) balance of on-going schemes started under existing agricultural creditprojects in Andhra Pradesh, Gujarat and Tamil Nadu; (b) on-going ARDC schemessatisfying project lending terms; and (c) new schemes.

Performance

10. As the project has been operational for only just over twelvemonths, it is too early to assess its full impact. The IDA disbursementsas of December 31, 1976, amounted to US$31 M (100% of appraisal estimates).However, projections based on ARDC commitments for schemes already sanctionedshow that the credit should be fully disbursed by June 30, 1977, six monthsahead of schedule.

11. The ARDC disbursements in support of loans to small farmers, as ofthe same date, was about 60% of total disbursements (appraisal target 50%).

12. The total number of schemes sanctioned was 828 for which thetotal ARDC commitment amounted to Rs 2,838 M (US$315 M), an average ofRs 3.4 M (US$0.4 M) per scheme. About 15% of the ARDC commitment (17% ofschemes) was in the less developed eastern and north eastern States; 28%

42

ANNEX 1Page 4

(26% of schemes) in other under-developed States, and the remaining 57%(57% of schemes) in other States. About 91% of the disbursements were forminor irrigation and 9% for diversified lending (appraisal estimates of 93%and 7%, respectively). About 75% of ARDC disbursement was to LDBs and 25%to commercial banks.

13. A training cell has been set up in ARDC to organize LDB stafftraining included in the project. The program is well under way and fulldetails are in Annex 6.

14. The project also included the following features: (i) a revisedsmall farmer definition; (ii) establishment of a standing committee to for-mulate common requirements for issuance of LDB debentures; (iii) commoncriteria relating overdues with eligibility for issuance of LDB debentures;and (iv) introduction of identified Districts having intensely developed orpotential problem areas relating to groundwater for which additional studieswould be required before ARDC sanctioned schemes there. All of these featureshave been successfully implemented and show good results.

15. The ARDC I provided for a study of the feasibility of mergingshort-term and long-term cooperative credit institutions. The study hasbeen completed and the report strongly recommends a merger; GOI is expectedshortly to decide on implementation of the recommendations.

16. The ARDC I is making satisfactory progress; disbursements are upto appraisal estimates, all project terms and conditions fulfilled, and allstudies completed. Although it is too early to assess project benefitsthe results of ARDC lending for similar projects indicate that rates of returnfor this project are unlikely to differ greatly from appraisal estimates.Preliminary results from evaluation studies are shown in Tables 2 and 4.

C. Market Developments

17. Two projects for market development viz., Bihar market yards, andKarnataka agricultural wholesale markets are under implementation. Theseprojects were designed to help with establishment of wholesale markets in anumber of towns in Bihar and Karnataka. Progress under the Bihar project hasgenerally been satisfactory. Markets construction in Bihar was delayed dueto legal challenges arising out of the State's acquisition of land for marketsites; however, these difficulties have been satisfactorily resolved. Con-struction of markets is well advanced and a number have opened for business.Progress under the Karnataka project is much less satisfactory, however,largely due to deficiencies in market planning, design and construction.These problems and remedial actions have been brought to the attention ofthe State and Central Government. The project is being monitored closelyto try and bring about the necessary improvements in implementation.

43

ANNEX 1Page 5

D. Fruit Processing and Marketing

18. The Himachal Pradesh apple processing and marketing project isdesigned to promote apple processing and marketing. The project, which com-prised grading and packing centers, cold storage, juice processing plant,road improvement and cable ways, encountered initial difficulties which could,by and large, be traced to managerial and technical problems. A sub-projectreport has been prepared by the Himachal Pradesh Horticulture Produce Market-ing and Processing Corporation Ltd., in respect of two packing and gradingcenters, and these have been earmarked to two commercial banks for implement-ation.

E. Dairy Development

19. Three integrated projects for dairy development are being imple-mented in Rajasthan, Madhya Pradesh and Karnataka. In all these projects,banking plans for financing dairy unions have been finalized. The ARDC hasorganized short duration training programs in Bangalore, Bhopal and Jaipurfor officers of participating banks and other agencies connected with projectimplementation. In Rajasthan, a Dairy Development Corporation has been setup and key staff appointed. The ARDC has also given clearance for technicalservices for two dairy unions. In Madhya Pradesh, a Dairy Development Corpo-ration has also been set up and senior staff positions filled. One schemecovering the technical requirements of Bhopal Dairy Union has been cleared byARDC. Detailed design studies for plant construction are expected to commenceshortly. In Karnataka, there has been some delay in project implementation.Improvement is now expected with the recent appointment by the Karnataka DairyDevelopment Corporation of a management consultant.

F. Command Area Development

20. Three command area development projects, two in Rajasthan and onein Madhya Pradesh are under implementation. The respective State governmentshave set up a command area development authority for each project. Bankingplans required under these projects have been finalized. In command areadevelopment, the entire area coming within a chak is fully developed. Inthe Chambal Command Area Development Project (Rajasthan), ARDC has clearedtechnically one catchment area program while in the Rajasthan Canal CommandArea Development Project, 302 chaks have been cleared. In the Madhya Pradeshproject, two schemes have been technically cleared by ARDC. The fourth project,viz., Andhra Pradesh Irrigation and Command Area Development Composite Projectenvisaging command area development on 72,000 ha in four irrigation commandsin Andhra Pradesh was sanctioned by IBRD in June 1976. One of the difficul-ties experienced in effective implementation of the command area program was

44

ANNEX IPage 6

the need to find resources for development of farms, the owners of which werenot eligible for normal banking loans. The ARDC, in consultation with GOI,has now formulated a scheme to overcome this and development should nowproceed.

G. Integrated Cotton Development

21. The Integrated Cotton Development project included all aspectsrelating to production of improved varieties of cotton and processing inselected areas of Punjab, Haryana and Maharashtra. It envisages modernizationof ginning and cotton seed processing facilities and research. A significantfeature of this project is provision of short-term funds for financing short-term credit requirements of cotton growers. For the first time, ARDC will beproviding refinance against short-term credit. Commercial banks which willparticipate in the project have been identified, and necessary guidelinesissued by ARDC.

H. Drought Prone Areas Project

22. The Drought Prone Areas project, which covers six Districts inMaharashtra, Andhra Pradesh, Karnataka and Rajasthan, envisages investmentsin minor irrigation, sheep and dairy development, horticulture, fisheries,sericulture, etc. The ARDC is required to prepare a banking plan covering,inter alia, the volume and type of agricultural credit required, legislativeand institutional changes required to facilitate credit flow, and the role tobe played by various credit institutions in the area. The corporation hasaccordingly constituted separate studies for each State and has preparedbanking plans for the six Districts.

I. Seeds Development

23. Two seeds projects, one in the Tarai region of Uttar Pradesh, andthe other a national seed project, have been sanctioned by IBRD. The loanto the Tarai Development Corporation is to assist in the production, process-ing and marketing of certified seeds of high yielding varieties. The Corp-oration is working effectively and has developed an excellent reputation forquality seed. Expansion of three processing plants is well under way.Delivery of some equipment in damaged condition, and retendering, becauseof poor response for some others, has delayed delivery schedules necessitat-ing an extension of the Closing Date by one year to December 31, 1977. Withregard to the national seed project, the National Seeds Corporation has with-drawn from seeds production as planned, having handed over to State Seeds

45

ANNEX IPage 7

Corporation (SSC). Detailed production programs, by variety and responsibleinstitution, have been prepared for breeder, foundation and certified gen-erations. GOI and State Governments have made equity contributions to SSCthus ensuring financing of major project activity. Orders will shortly beplaced for processing machinery to provide bridging capacity pending theconstruction of new processing plants. Tender documents for the first pur-chases of farm machinery have been finalized.

24. A summary of projects showing effective dates, closing dates anddisbursements is given in Table 1.

April 1977

46

ANNEX 1Table 1

INDIA

AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Summary of Bank Group Projects Financed through ARDC

Credit Effective Closing Project IDA Disbursed toNo. Date Date Cost Credit December 31.1976

------- US$ (H-------

AGRICULTURAL CREDIT

Gujarat 191 9/70 3/75 67.0 35.0 35.0Punjab 203 9/70 6/77 40.0 27.5 16.8Andhra Pradesh 226 5/71 6/77 45.0 24.4 22.2Haryana 249 11/71 6/77 44.5 25.0 25.0Tamil Nadu 250 11/71 6/77 62.3 35.0 29.6Karnataka 278 9/72 6/77 70.4 40.0 34.6Maharashtra 293 1/73 6/77 51.9 30.0 30.0Madhya Pradesh 391 10/73 12/77 59.7 33.0 30.1Uttar Pradesh 392 10/73 12/77 72.5 38.0 20.0Bihar 440 3/74 6/77 60.0 32.0 11.8ARDC 540 8/75 12/77 168.5 75.0 31.2West Bengal 541 8/75 3/80 67.0 34.0 0.5

Sub-total 808.8 428.9 286.8

MARKETS

Bihar 294 7/72 12/78 23.3 14.0 2.4Karnataka 378 9/73 12/79 12.0 8.0 0.4

Sub-total 35.3 22.0

PROCESSING

HP Apples 456 9/74 12/78 21.7 13.0 1.3

DAIRY DEVELOPMENT

Karnataka 482 12/74 9/82 63.7 30.0 -Rajasthan 521 8/75 12/82 51.8 27.7 0.2Madhya Pradesh 522 7/75 6/82 31.2 16.4 -

Sub-total 146.7 74.1 0.2

COMMAND AREA DEVELOPMENT

Rajasthan 502 12/74 6/81 174.0 83.0 23.6Chambal 562 9/75 12/79 46.6 24.0 1.9Chambal (Rajasthan) 1011 12/74 6/81 91.5 52.0 9.6Andhra Pradesh 1251 - 12/82 297.0 145.0 -

Sub-total 609.1 304.0 35.1

INTEGRATED COTTON 610 8/76 12/81 30.0 15.0 -

DROlGHT PRONE AREA 526 6/75 6/80 21.7 35.0 2.1

SEEDS

Tarai Seeds 614 9/69 12/76 22.4 13.0 9.2National Seeds. 1273 - 6/81 52.7 25.0 -

Sub-total 75.1 38.0 9.2

Total 1748.4 933.0 337.5

47

ANNEX 1Table 2

INDIA


Summary Results from ARDC Evaluation Studies-/

Land Development Minor Irrigation

Karnataka Andhra Pradesh Maharashtra Haryana

Sample size 78 76 39 118

Benefitting area (ha) 3.0 3.0 2.0 3.5

Cropping intensity (%) 176 185 114 179

Average net income frombenefiting area (Rs) 9,055 6,742 3,210 10,678

Incremental net income frombenefiting area (Rs) 7,939 5,806 2,548 4,616

Financial Rate of Return (%) over 50 over 50 29 over 50

Total investment (Rs) 3,005 3,435 n.a. n.a.

1/ The ARDC Evaluation Cell which was set up in January 1974 has conducted thefollowing four evaluation studies of land development and minor irrigationschemes:

(i) Land Development Scheme in Karnataka.(ii) Land Development Scheme in Andhra Pradesh.(iii) Minor Irrigation Scheme in Maharashtra.(iv) Minor Irrigation Scheme in Haryana.

Reports on the land development studies have been published; the results fromthe minor irrigation schemes are, however, preliminary.

48

March 25, 1977

ANNEX 1Table 3

INDIA


Selected Financial and Economic IndicatorsFrom Gujarat Agricultural Project (191-IN) PCR

…------- Area ----

1/Hardrock

1. Financial Results Per Farm (Saurashtra) Alluvial

Estimated average farm size - ha 8 6Incremental gross irrigated area - ha 3.5 7.0Investment cost - Rs 2/ 18,300 34,900Incremental net income from

irrigation - Rs 3/ 4,000 7,400Financial rate of return (%) 12 4/ 30

Completion Appraisal2. Economic Rates of Return (%) Estimate Estimate

Hardrock (Saurashtra) areas 13Alluvial areas 34Whole project 28 23

1/ The hardrock model represents about 45% of project loans and thealluvial model about 30%

2/ Average per investment in minor irrigation in 1975 prices

3/ 1975 prices

4/ The low rate of return resulted from successive two years ofsevere drought.

49

SECOND AGRICULTURAL REPFNANCE AND DEVS.2?CORPORATION CREDIT FF03ECT

Preliminarv Resultsfron Farm B§fit Survev in.Andhra PradeshMricultural Credit Pro)ect (?26-TN)

( average per b>eneficiary)

--------------------------------------- Dugwells -------------------------------------- ---- Dugwell and Pumpset ----- -- Filterpoints--Rock Formation Rock Formation Rock Formation Rock Formation Rock Formation Rock Formation Rock Formation Rock Formation

Granites Quartzites Cry_ rallines Basalts Shales Granites Khondalites AlluviumOhr Small Other Small Other Small others

Farmers Farmers Farmers Farmers Farmers Farmers Other Farmers Other Farmers Other FarmerE Other Farmers Farmers Farmers

1. Benefitting area (ha) 1.2 1.5 1.5 1.2 1.2 1.4 1.7 1.3 1.4 2.8 1.1 1.7

2. Investment cost (Rn) 2,955 4,820 5,600 6,118 1,800 2,550 7,422 4,714 9,742 14,000 3,200 4,846

3. Value of gross produce (RIt)- 3,100 5,157 3,870 3,576 2,295 2,793 13,367 4,385 5,911 12,500 7,150 10,186

4. Production costs (Rs)-! 1,635 2,419 2,000 1,633 1,115 1,435 5,85h 1,776 2,301 4,290 2,662 4,746

5. Net farm income (Rsj-/ 1,465 2,768 1,870 1,943 1,180 1,358 7,509 2,609 3,610 8,210 4,488 5,440

6. Net Incremental income (Rs) / 704 2,026 1,353 920 1,060 1,011 7,282 1,824 2,973 2,430 3,245 1,720

7. Financial Rate of Return (8) 24 42 24 15 Over5O 40 Over 50 39 29 15 Over 50 30

_/ According to IDA definition.

2/ In 1976 prices.

R ote: The above are preliminary results from a sample survey of beneficiaries under the project, 1o conducted and analyzed by Andhra Pradesh Agricultural Development Bank (LDB).

ANNEX 2Page 1

INDIA


Groundwater and Minor Irrigation

Geology and Physiography

1. India has an area of 328 M ha and, physiographically, there arethree large regions: (a) the northern mountains; (b) the Indo-Gangeticplains; and (c) the peninsula.

2. The northern mountain region (Himalayan range) with elevationswhich often exceed 7,000 m is a rugged area of intensely folded and faultedmountain chains of geologically recent origin. The rocks are primarily sedi-mentary, with a core of young granitic intrusions. Mountain-building forcesare still active with frequent earthquakes of varying magnitudes.

3. The Indo-Gangetic plains with elevations generally less than 300 mwere formed by a deep sag in the earth's crust, probably contemporaneous withthe Himalayan uplift, that has been filled with alluvial sediments derived fromhigher lands to the north and, to a lesser extent, lower hills to the south.

4. The peninsula with elevations generally ranging between 200 and1,000 m occupies most of the country in the south and is an ancient stableplateau or shield developed on the underlying igneous and metamorphic rocks.A large area of the western part of the plateau has been covered with athick series of horizontal lava beds (Deccan trap) and some younger sedimen-tary rocks have been deposited along the narrow coastal plains of both theArabian Sea and the Bay of Bengal.

Climate

5. The major climatic features are: (a) Himalayan mountains in thenorth, a barrier against cold air masses of Central Asia, giving the coun-try the elements of a tropical climate; and (b) the ocean on the south, thesource of moisture-laden monsoon winds. Although climatic and weather con-ditions are widely diverse throughout the country, the five distinct regionswith a fairly uniform broad pattern are:

(a) northwest India -- western Rajasthan, Punjab andadjacent areas;

(b) north-central India -- eastern Rajasthan, Gujarat,Haryana, northern Madhya Pradesh, Uttar Pradesh andBihar; 51

ANNEX 2Page 2

(c) peninsula India -- southern Madhya Pradesh and thepeninsula to the south;

(d) eastern India -- Orissa, West Bengal, Assam andadjacent north eastern states; and

(e) coastal plains -- bordering the peninsula along theocean.

6. The southwest moitsoon begins at the end of May or early June andcontinues until December. During this period, the country receives most ofits rainfall, particularly June-September, when most areas receive 80% ormore of the total annual rainfall. The distribution of annual rainfall,which ranges from 200 to 300 mm in the western Rajasthan desert to morethan 5,000 mm along the Western Ghats of the peninsula and in the hills ofAssam, is shown on Map 12630. The duration of the monsoon is at a minimumin the northwest region and at a maximum in the southern peninsular region.For rainfed agriculture, the crucial months are July and August, and theamount and distribution of rain in these two months largely determines thefate of kharif crops.

7. In addition to definite seasonal distribution of rainfall, thereare frequently large monthly variations from normal, from one year tothe next. Rainfall is most uncertain in Gujarat, Haryana, Punjab andRajasthan, the same areas of lowest total annual rainfall.

8. The average temperature range throughout the year is 10C to 150Cin the southern coastal areas, increasing to 25 0C or more in the northerninland. The coldest period throughout the country is in December-Januarywhen mean maximums vary from 290C in parts of the peninsula to 180C in thenorth and mean maximums from 240C in the extreme south to below 5°C in thenorth. During March to May, there is a steady rise in temperature with thehighest values, exceeding 480C, occurring in the north in May (particularlyin the northwest desert areas). With the advent of the southwest monsoon byearly June, there is a rapid fall in maximum temperatures in the central areas.Generally, temperatures are practically uniform over the two-thirds of thecountry which gets good rainfall during the monsoon. Temperatures generallybegin to decline throughout the country by August.

9. Evaporation rates closely follow the seasons, reaching a peak inthe summer months of April and May, particularly in the central areas whereevaporation is highest. With the beginning of moisture-laden monsoon windsand heavy rainfall in June, there is a marked fall in evaporation rates.Total annual pan evaporation, in cm, is shown on Map 12630.

52

ANNEX 2Page 3

Soils

10. The four major soil groups are alluvial, black, red, and laterite.Of lesser importance are forest, desert and saline-alkaline soils. Indiansoils, like most tropical soils, are generally deficient in organic matterand nitrogen. Phosphate deficiency is less prevalent and potash deficiencyis rare.

11. Alluvial soils form the largest and mostimportant group, occurringprincipally in valleys of the Indo-Gangetic and Br#hmaputra river systems aswell as other river valleys and along coastal areas. Occassional featuresof these soils are the occurrence of hardpan at certain levels in soil pro-file and presence of lime concretions ("kankar"), particularly in the Indo-Gangetic alluvium of Uttar Pradesh, Punjab and Delhi. Soils are generallywell suited for irrigation of crops.

12. Black soils ("regur" or "cotton soils") occur chiefly in AndhraPradesh, Gujarat, Madhya Pradesh, Tamil Nadu, Maharashtra and Karnataka.These soils have been formed from the weathering of basalts of the Deccantrap and granites, gneisses, and schists of the peninsula. As a group theyare fine-textured with 40% to 60% clay, plastic and sticky when wet, andvery hard when dry. Upon drying, they shrink and cracks may develop to thedepth of a meter or more. Good sub-surface drainage is a requirement in irri-gated areas to prevent development of salinity and waterlogging problems.

13. Red soils, derived from weathering of acidic igneous and metamorphicrocks, occupy large areas of southern India (Tamil Nadu, Karnataka, Kerala,southeast Maharashtra, eastern Andhra Pradesh and Madhya Pradesh) as wellas some localities in Orissa, West Bengal and Uttar Pradesh. Soils aretypically friable, permeable, well drained, easily managed and well adaptedto irrigation.

14. Laterite soils occur mostly in the south near margins of the penin-sula. They are primarily a mixture of hydrated oxides of iron and aluminum,low in organic matter and most plant nutrients, with good drainage capacity.

Surface Water

15. To assess broadly the available water resources, there are sixmajor regions: Indus Basin; the Ganges system; the Brahmaputra system; EastCoast rivers; West Coast rivers, and the Rajasthan region. A summary of dataon each region is in Table 1, and the location of principal rivers is onMap 12630.

16. Of the estimated total average runoff of 167.3 M ha meters, it isestimated that 66.5 M ha meters (40% of the total) could be utilized for ir-rigation. Most of this potential is within the Ganges system, East Coastrivers, and Tapti and Narmada river basins of the West Coast region.

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ANNEX 2Page 4

17. The annual flow pattern of rivers with sources in the Himalayas ismarkedly different from those originating in the peninsula area. In thosewith Himalayan sources, the dry weather flow is significantly increased bywater from melting snows and glaciers, and at no time is the flow so reducedas in peninsula rivers where heavy discharges occur during monsoons followedby very low discharge (base flow from ground water inflow) during rainlessmonths. Variations in mean monthly flows of peninsula rivers of the order of1 to 300 are common.

Groundwater

i8. Occurrence. Groundwater occurrence throughout India can be gener-alized into five broad categories which relate to the geology and physiog-raphy of the country (Map 12630): (1) areas of alluvial deposits alongmajor rivers and coastal zones; (2) areas of crystalline "hard rock" in thepeninsula; (3) consolidated sediments along coastal areas; (4) thin alluviumand wind-blown sands of the Rajasthan desert; and (5) mountainous areas ofthe north and east.

19. Alluvial aquifers are the most important category both from thestandpoint of present development as well as future potential. Water isdeveloped from permeable silts, sands and occassional gravels within thealluvium by means of open (dug) wells and tubewells. Most of the alluvialaquifers are in the Indo-Gangetic plain and Brahmaputra valley, with minoradditional areas along major river valleys and on the eastern and westerncoasts of the peninsula. The total thickness of alluvium in the Indo-Gangetic plain may be as much as 1,000 m or more in places but deep tube-wells for groundwater development are seldom drilled below depths of 300 to500 m. The pumping rats from typical installations is 150-200 m /hsur fordeep tubewells, 25-50 m /hour for shallow tubewells, and up to 25 m / hourfor dug wells.

20. The "hard rock" area of groundwater occurrence is also of greatimportance because such a large area of the country is included (essentiallyall of the peninsula) and also because much of the area receives insufficientrainfall so that irrigation is essential to crop production. Aquifers ofthe area are the upper weathered and jointed zones of underlying crystallineigneous and metamorphic rocks (granites, gneisses, and schists). In thelarge area underlain by basalt flows (Deccan trap), the water occurs alonginterflow zones as well as in the upper weathered zone and joints or cracksin the rock. The depth of weathering varies, being typically 5 to 15 m, andoccasionally as much as 25 to 30 m. Development is usually with dug wells,some of which have been deepened with small diameter bore holes to increaseyield (dug-cum-bore wells). In many areas, small diameter drilled bore wells,to depth of 35 to 50 m, will produce as3much water per day as open dug wells.Typical well yields are from 50 to 75 m /day.

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ANNEX 2Page 5

21. Consolidated sediments, such as sandstone, occur primarily alongcoastal margins of the peninsula and furnish groundwater to tubeweils.Typical wells are from 30 to 150 m deep with yields of 20 to 100 m /hour.

22. In the Rajasthan desert area of the northwest, consolidated rocksare typically covered with thin deposits of wind-blown sand or occasionalalluvium. Because of scanty and unreliable rainfall, there is little oppor-tunity for extensive additional groundwater development in this area.

23. The principal occurrence of groundwater in the mountain areas ofnorthern and eastern States is from small alluvial deposits along streamvalleys. Much of the bedrock is relatively unweathered which, in combina-tion with steep topography, makes wells generally infeasible.

24. Recharge. The principal recharge to groundwater comes from infil-tration of direct precipitation on an area, or from deep percolation resultingfrom irrigation. In some areas, seepage from unlined irrigation canals isa major source of recharge. Lateral subsurface inflow from adjacent areascan be significant in some alluvial terrains, particularly along the southernfoot hills of the Himalayas. Rivers and streams are not generally sources ofrecharge except where immediately adjacent to channels during flood runoff.Exceptions to this would include rivers crossing alluvial fans on lowerHimalayan slopes and dissipation, by seepage, of flow in ephemeral streamsof western desert areas.

25. Recent estimates of annual recharge in each State, together withpresent utilization, has been prepared by State groundwater organizationsand CGWB and are given in Table 2. These estimates, amounting to about 31 Mha m total recharge, tend to be more qualitative than quantitative. The pres-ent need is for more precise evaluation of recharge from all sources, basedupon reliable field and laboratory measurements rather than empirical formulas,particularly is areas which are already intensively developed.

26. Quality. Groundwater quality is generally good throughout India,suitable for irrigation and other uses, except for some areas along the coastas well as a few limited interior locations. The principal coastal areas withsalt water in aquifers are in southern West Bengal, Orissa, Tamil Nadu andGujarat. Fairly extensive areas of saline groundwater are found in the inte-rior in Punjab, Haryana, Rajasthan and Uttar Pradesh with more minor occur-rences at scattered localities in Karnataka, Maharashtra and Andhra Pradesh.Many of the interior occurrences are the result of high evaporation in irri-gated areas with inadequate drainage; in some cases salinity is concentratedin shallow zones and fresh water is encountered at depth.

27. Utilization. An estimated 11 M ha m of groundwater were withdrawnin 1973/74 (Table 2). This amounts to about 35% of total estimated annualrecharge, ranging from a negligible percentage in Assam, Jammu and Kashmir,and Kerala, to more than 50% in Gujarat, Haryana, Punjab, Rajasthan,

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ANNEX 2Page 6

and Tamil Nadu. Almost all groundwater used is for irrigation. Industrial,domestic and livestock requirements are estimated to be less than 5% oftotal withdrawals. Growth in net area irrigated from wells and other sourcessince 1950/51, and distribution by States for 1970/71, is given in Table 3.The Indo-Gangetic plain States of Punjab, Haryana, Uttar Pradesh, Bihar, andWest Bengal comprise only 20% of the area of the country yet account for morethan one half of groundwater used and net area irrigated from wells.

28. Control. Gujarat is the only State which has enacted groundwaterlegislation to prevent local over--exploitation. A model law was drafted byGOI designated "The Groundwater (Control and Regulation) Bill" and circulatedin December 1970, to all State governments for their consideration. The modellaw would enable State governments to designate areas where regulation ofdevelopment was considered necessary and to control, through a permit andlicense system, construction of wells and extraction of groundwater. Con-tinued efforts should be made to encourage early adoption of adequate controlby enacting legislation in each State.

29. Some degree of control of groundwater utilization and developmentis becoming increasingly necessary in many localities in order to: protectwater quality; protect existing water users by preventing excessive inter-ference and lowering of water levels, and to prevent local developments fromexceeding available average replenishment which results in "mining" of water.In the absence of adequate legislation, some measure of control has been

achieved in existing IDA and ARDC credit projects by requiring a minimumspacing between wells financed under these projects. The degree of controlachieved may be unsatisfactory, however, because it does not apply to pri-vately financed developments.

30. There is general agreement that overdevelopment and related prob-lems, such as water quality, exist (or will soon exist) in certain localities.It is difficult to define these localities geographically since hydrologicboundaries seldom coincide with political subdivisions. Since there is vir-tually no existing groundwater control legislation, and it does not appearthat there will be within the next several years, it is recommended that partsof certain Districts within several States be designated, for this project, as"intensively developed and/or potential problem areas". It is further recom-mended that no investments be made for groundwater development in these par-ticular localities until the appropriate State government has either institutedacceptable controls over sinking of new wells in those areas, or carried outfurther technical studies proving that there is no longer a problem in thoseareas and that such areas could, at the discretion of ARDC, be removed fromthe problem list.

31. The special justification reports should include more detail thanhas usually been developed in the past for such items as available recharge(from all sources), reliability of recharge, present withdrawals, historicaland present water level fluctuations, water quality, and well constructionconsiderations, etc. Use of empirical formulas or rule-of-thumb methods

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ANNEX 2Page 7

would generally be unacceptable. Actual field and laboratory measurementsshould be presented and some test drilling or test pumping (of adequateduration) might be required.

32. The areas of 57 Districts in ten States recommended for such desig-nation as "Intensively Developed and/or Potential Problem Areas" are listedin Schedule A. In some of these areas listed, the problem may occur in onlya part of the area and, upon submission of adequate justification, certainvillages might be excluded from the designation; similarly, as additionaldevelopment takes place or data becomes available, it may be necessary toadd new areas.

33. Guideline criteria for minimum well spacing, well density, andpermissible water quality for this project are given in Schedule B. TheARDC would be permitted to relax these criteria only after a careful reviewand approval of supporting data as to local conditions that would justifysuch action.

Staff and Institutions

34. Existing technical staff of ARDC, GOI and States are adequate tocarry out their aspects of minor irrigation work proposed in this project.Additions to existing staff are planned in all States, and will be necessaryin some cases, if major lending programs are to be implemented. In pastyears, most existing staff capability throughout India has been directedtowards finding and developing groundwater, with emphasis on geology anddrilling. The primary need at this time is to increase attention givento quantitative evaluation and management of groundwater resources, withemphasis on hydrology.

35. Agricultural Refinance and Development Corporation (ARDC). Thetechnical staff of ARDC involved with minor irrigation schemes includes aheadquarters group in Bombay and field technical units in Calcutta andLucknow. The Calcutta unit reviews all schemes in the eastern area (Orissa,West Bengal, Bihar, Assam, and north eastern States) and the Lucknow officereviews work in Uttar Pradesh and Madhya Pradesh. Final review of allschemes, and sanctions, are at the Bombay office.

36. In Bombay, the unit is headed by a deputy director assisted by twosenior and two junior technical analysts; one more analyst is in the processof joining. The Calcutta unit is headed by a deputy director with one analyst,and there is another analyst in Lucknow. Present ARDC plans provide for anadditional 50 persons on their technical staff -- about one-half being inminor irrigation or land development functions. Some of this added staff,mainly intended for regional offices, should be in post by June 1977.

37. The principal function of ARDC staff is to review minor irriga-tion schemes proposed by States, both from technical feasibility (availabil-ity of water, proper design, etc.) and economic aspects (adequacy of cost

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ANNEX 2Page 8

estimates, etc.). This function is properly and adequately exercised atpresent, but an irrigation engineer is needed on the headquarters staff todirect the review of an increasing number of lift irrigation and deep tube-well applications. He is scheduled to be in post by July 1, 1977.

38. Central Groundwater Board (CGWB). The CGWB was established in1970 by GOI to replace the Exploratory Tubewells Organization which hadbeen created in 1954 to investigate and test the thick alluvial aquifersof the Indo-Gangetic plain. In 1972, the groundwater wing of the GeologicalSurvey of India was merged into CGWB to establish a single organization incentral government concerned with groundwater investigation and development.

39. In addition to conducting special investigations throughout thecountry (including drilling and testing of wells), CGWB has the importantresponsibility of assisting State groundwater organizations and coordinatingState programs. Experienced CGWB personnel are frequently assigned to workwith States in building up and training local staffs. The CGWB headquartersare near New Delhi, with seven regional and seven special project officesthroughout the country.

40. State Institutions. Almost all States have established organiza-tions for conducting hydrological investigations as well as units which pro-vide custom service in boring and deepening dug wells, and in drilling tube-wells. Administratively, these organizations may be under any one of a numberof headings such as Departments of Agriculture, Minor Irrigation, Public Works,Irrigation, Mines and Geology, etc. or Tubewell Corporations, Agro-IndustryCorporations, etc. Unfortunately, in individual States these functions maybe divided administratively, and this often hampers fullest coordination ofgroundwater activities. A tabulation of current professional and sub-professional staffing, by States, is in Table 4.

41. Each State groundwater organization has plans for increasing staffand strengthening capability, and many organizations are implementing suchplans. All States are considered capable of preparing and analyzing schemesfor this project although some may need assistance from ARDC or CGWB whilethey are building staff capability. The magnitude and rate of future lendingunder the project, in States with weaker staffs, will depend somewhat upon therate at which staff can be strengthened.

Training

42. Since 1966, CGWB has given courses in groundwater and water welltechniques to senior level professionals from State organizations and fromtheir own staff. Tamil Nadu has also offered training courses to membersof their own staff as well as to candidates from other States. So far this

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ANNEX 2Page 9

training has been adequate, but to meet India's minor irrigation expansionprogram it would be advisable for GOI to carry out a study of future trainingrequirements so that a program could be included in the next agriculturalcredit project.

March 1977

59

ANNEX 2Table 1

INDIA


Surface Water Resources - Estimated RunoffEsti-mated

Major River Catchment Annual UtilizableRegion Basins States Area Rainfall Temperature Runoff Runoff

(M ha) (mm) (°C) (M ha m) (M ha m)

Indus Ravi Jammu & Kashmir 35.4 560 12.6 7.9 4.9Basin Beas Punjab

Sutlej HaryanaHimachal Pradesh

Ganges Ganges Uttar Pradesh 97.6 1,110 16.8 49.o 18.5system Yamuna Haryana

Chambal RajasthanChagara Madhya PradeshCandak BiharKosi West Bengal

Bhrama- Brahmaputra Arunachal Pradesh 50.6 1,220 8.2 38.1 1.2putra Subansiri Assamsystem Manas Nagaland

Teesta MeghalayaWest Bengal

East Cauvery Madhya Pradesh 121.0 1,090 26.1 41.2Coast Krishna Bihar

rivers Godavari West BengalMAhanadi Orissa 41.9Subarnarekha Andhra PradeshDamodar Maharashtra

MysoreTamil Nadu

West Tapti Gujarat 49.2 1,220 25.5 31.1Coast Narmada Maharashtra

rivers Mahi MysoreSabarmati Kerala

Rajasthan Rajasthan 16.8 290 26.2 - -

Total: 370.6 - - 167.3 66.5

December 14, 1976

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ANNEX 2Table 2

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPNENT CORPORATION CREDIT PROJECT

Estimated Groundwater Availability and Utilization - 1973/74

Annual Annual Unused PercentState Recharge Draft Balance Utilization

- ------ M ha m --- -'Andhra Pradesh 3.26 1.05 2.21 32Assam* 1.46 0.03 1.43 2Bihar 2.57 0.61 1.96 24Gujarat 1.22 o.83 0.39 68Ilaryana 1.00 0.60 o.40 60Jammu & Kashmir 0.25 0.01 0.24 4Karnataka 1.28 0.38 0.90 30Kerala O.94 0.01 0.93 1Madhya Pradesh 3.05 o.49 2.56 16Maharashtra 2.15 0.75 1.40 35Orissa 1.27 0.20 1.07 16Punjab 1.10 o.84 0.26 76Rajasthan O.85 o.69 0.16 81Tamil Nadu 1.46 O.86 o.60 59Uttar Pradesh 7.65 3.33 4.32 44West Bengal 1.95 0.39 1.56 20

Total: 31.46 11.07 20.39 35

December 14, 1976

* Includes other northeastern states.

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ANTNEX 2Table 3

INDIA


Net Area Irrigated by Sources 1970/71(thousands ha)

State Canals Tanks Wells Others Total

Andhra Pradesh 1,581 1,113 510 109 3,313Assam* 365 3 1 339 708Bihar 815 168 551 626 2,160Gujarat 207 30 962 10 1,209Haryana 950 2 575 5 1,532Himachal Pradesh - - 1 90 91Jammu and Kashmir 272 - 1 6 279Karnataka 421 365 259 92 1,137Kerala 211 73 5 142 431Madhya Pradesh 710 130 562 78 1,480Maharashtra 313 225 821 68 1,427Orissa 262 583 45 259 1,149Punjab 1,291 - 1,591 6 2,888Rajasthan 757 271 1,083 21 2,132Tamil Nadu 884 897 775 36 2,592Uttar Pradesh 2,494 374 4,034 288 7,190West Bengal 963 302 16 208 1,489Union Territories 25 7 44 9 85

All India (1970/71) 12,521 4,543 11,836 2,392 31,292

(1969/70) 12,256 4,448 11,146 2,490 30,340

(1968/69) 11,894 3,956 10,813 2,362 29,025

(1965/66) 10,947 4,270 8,653 2,473 26,343

(1960/61) 10,370 4,561 7,290 2,440 24,661

(1955/56) 9,385 4,423 6,739 2,211 22,758

(1950/51) 8,295 3,613 5,978 2,967 20,853

* Incluues other north eastern states.

December 14, 1976

62

ANNEX 2Table 4

INDIA


State Groundwater Organization Staffing - November 1976

Groundwater Investigation Drilling andState Professional Sub-Professional Development-

Andhra Pradesh 65 43 7Assam 82 109 445Bihar 21 9 31Gujarat 109 92 244Haryana 97 148 189Karnataka 125 20 282Kerala 11 8 4Madhya Pradesh 74 177 363Maharashtra 189 17 932Orissa 119 127 247Punjab 9 11 68Rajasthan 89 22 679Tamil Nadu 96 139 800Uttar Pradesh 35 48 27West Bengal 24 8 2

Total: 1,145 978 4,320

December 14, 1976

63

ANNEX 2Table 5

INDIA


Irrigation Wells

Anticipated Achievement as at June 30, 1974(thousands)

Private State(deep) ElectrifiedState Dug Wells Tubewells Tubewells Pumps

Andhra Pradesh 600.0 30.0 - 253.0Bihar 249.6 25.0 1.8 100.5Gujarat 610.0 1.5 1.4 105.0Haryana 31.0 162.0 1.1 135.0Jammu & Kashmir 6.o - .1 .4Karnataka 350.0 .7 - 190.0Kerala 5.0 1.0 - 38.0Madhya Pradesh 700.0 1.2 .1 130.0Maharashtra 764.5 .4 - 315.0Orissa 40.0 .1 .3 125.0Punjab 160.0 162.0 .9 75.0Rajasthan 700.0 .6 .1 715.0Tamil Nadu 1,035.4 50.0 - _Uttar Pradesh 1,280.5 382.0 12.8 235.0West Bengal 2.9 4o.o 2.0 2.0Others .1 .1 - 3.0

Total 6,535.0 856.6 20.6 2,421.9

Source: C.W. and P.C. (P.W.); R.E. Directorate (July 11, 1973).

December 14, 1976

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ANNEX 2Table 6

INDIA


Villages Electrified as on March 31, 1974(thousands)

% ElectrifiedState Total Number Electrified (of total)

Andhra Pradesh 27.2 10.3 37.9Assam 21.5 1.2 5.6Bihar 67.6 9.6 14.2Giujarat 18.3 5.6 30.6Haryana 6.7 6.7 100.0Himachal Pradesh 16.9 4.5 26.6Jammu & Kashmir 6.5 1.4 21.5Karnataka 26.8 12.6 47.0Kerala 1.3 1.3 100.0Madhya Pradesh 70.9 10.7 15.1Maharashtra 35.8 16.9 47.2Manipur 1.9 0.2 10.5Meghalaya 4.6 0.1 2.2Nagaland 1.0 0.1 10.0Orissa 47.0 8.1 17.2Punjab 12.2 7.1 58.2Rajasthan 33.3 5.8 17.4Tamil Nadu 15.7 13.8 87.9Tripura 4.7 0.1 2.1Uttar Pradesh 112.6 29.8 26.5West Bengal 38.1 8.7 22.8

States Total: 570.6 154.6 27.1

Other Territories 5.2 1.1 21.2

All India Total: 575.8 155.7 27.0

Source : National Commission on Agriculture, 1976

December 14, 1976

65

ANNEX 3

Page 1

INDIA


Cooperative Banks, Cooperative Land DevelopmentBanks and Commercial Banks

I. Cooperative Banks

Background

1. Cooperatives are constituted under State law and within each Statethere is a three-tiered cooperative structure: primary cooperative societies(PCSs) at village level; District central cooperative banks (DCCBs) at Districtlevel and State cooperative banks (SCBs) at State level.

2. The agricultural cooperative system in India has been operating forseveral decades although its performance, especially at the primary level,has been far from satisfactory. Many PCS, are small in membership, financialresources and volume of business. This alone can account for a major por-tion of unsatisfactory operations. Small organizations cannot afford norjustify employment of qualified, competent, full-time management. AlthoughPCSs extend short- or medium-term loans, the preponderance of such loans areshort-term. Many PCSs have incurred excessively high overdue loans and baddebts; this, along with poor financial operations, raises a question as totheir viability. Concern in this area has resulted in top priority beinggiven to reorganization and rehabilitation of weak primary societies.

3. A major criticism of the cooperative system, particularly creditsocieties, is that their activities benefit mainly larger farmers, althoughsmall farmers comprise the majority. In order to ensure a credit flow tosmall and marginal farmers, the Reserve Bank of India (RBI) insists that atleast 20% of DCCB's outstanding borrowings from SCB should be covered byoutstanding loans to societies for small and economically weak farmers.

4. Farmers have often been unable to realize the full benefit fromtheir investments to increase production because of lack of supplies, proces-sing and marketing facilities as well as other supporting services. Whereinstitutions or agencies for these exist, there is a need for better coor-dination. Better coordination between the two types of credit societies, SCBand land development banks (LDBs), would ensure that farmers would be providedwith timely production credit to fully complement the investment undertakenwith funds from long-term credit societies. In accordance with the terms ofARDC I, a committee was appointed by GOI to study the feasibility of merg-ing the short- and long-term cooperative institutions. The report of the

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committee, which strongly supports a merger, has been published, and GOI hasasked RBI to appoint a cell to further study the committee's recommendation.The GOI expects to make a decision on the recommended merger during thenext few months. A summary of the main recommedations of the committee isin Appendix 1.

Primary Cooperative Societies (PCSs)

5. The main functions of PCSs are the provision of short- and medium-term credit, supply of agricultural and other production requirements, andmarketing of agricultural produce. The number of PCSs has decreased fromabout 157,800 at the end of June 1972 to about 153,800 at the end of June1974. During the same period, however, total membership increased fromabout 32 million to 35 million. About 18,100 dormant societies were await-ing final action either by revitalization or by liquidation. The recoveryposition of PCS has been deteriorating over a number of years and has reachedthe point that prompt action needs to be taken if many societies are to remainviable. A more complete discussion on overdues can be found later in paras16-19.

District Central Cooperative Banks (DCCBs)

6. The DCCB constitutes the intermediate tier, and coordinates cooper-tive credit activity within the District, receives and distributes for allPCSs and supervises lending activities. Each DCCB generally has a number ofbranch offices in the District and a staff of credit inspectors to carry outits functions. Caliber of management and staff varies considerably. Theoverdues position is causing concern although it does vary from State to State.Action needs to be taken to correct this situation (paras 16 to 19).

State Cooperative Banks (SCBs)

7. The SCB coordinates and guides the affairs of other tiers in thecooperative credit structure in each State. Members of SCB are the DCCBand the State government. The SCB provides short- and medium-term loans tofinance farmers through their member PCS. The preponderance of loans issuedby SCB is short-term credit for seasonal agricultural operations. The problemsof overdues is not so serious at the SCB level since the overdues are mostlyabsorbed at lower tiers. Although overdues in aggregate terms have beenincreasing at the SCB level in recent years, improvements are showing insome States (Table 1).

Rescheduling of Cooperative Overdues

8. Heavy overdues can result from natural calamities such as droughtor flood. In order to afford relief to cultivators in times of naturalcalamity, stabilization funds have been built up with RBI at different levelsof the cooperative credit structure, and also at the national level.

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ANNEX 3Page 3

II. Land Development Banks (LDBs)

9. The long-term cooperative credit structure is made up of two tiers,State land development banks (SLDBs) at State level, and primary land devel-opment banks (PLDBs), or branches of the SLDB, at village level. The patternin most States is a federal structure while seven State/union territories havea unitary structure. Two States have a mixed organizational pattern.

10. The PLDB raise funds from share capital and deposits but the mostimportant source are borrowings from SLDB. The SLDB funds mainly come fromshare capital, deposits, loans and grants from State governments, and saleof debentures.

11. The PLDB loans must be secured by a first mortgage on land.Applications for loans are reviewed as to the purpose for which funds willbe used, and a financial analysis is made to determine incremental incomethat will accrue to the applicant as a result of the investment. Loanrepayment is expected to be made from incremental income. The PLDB com-mittees approve loans using lending criteria established at the SLDB level.

12. Lending operations, which had been declining, are presently showingsignificant growth. The main problem of the LDB is heavy overdues, the levelof which varies from State to State, and which, in some States, continues topersist at high levels. The RBI and the Agricultural Refinance and Develop-ment Corporation (ARDC) have invoked sanctions in an effort to bring aboutimprovements in the overdues situation and provisional figures for 1975/76show some improvements (Table 2). Eligibility of PLDB and SLDB branches forissuance of new debentures during the year is related directly to recoveryperformance during the preceding years. The amount of the lending programis a specified percentage of disbursements made during the previous year orthe annual average for the previous three years, whichever is the higher,according to the following scale:

Eligible Lending Program(% of loans issued to the

previous year or annual averageRange of Overdues for the previous three years,

(% of Demands) whichever is higher)

0 - 25 Unrestricted

26 - 35 8036 - 45 7046 - 55 6056 - 60 5061 - 100 Nil

13. As of October 1, 1977, or such other date as may be agreed betweenIDA and ARDC, no SLDB branch or PLDB shall be eligible for refinance unlessit achieves an actual recovery rate of not less than 65% of demand. Minor

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ANNEX 3Page 4

amendments to the criteria, usually of a temporary nature, may be made asagreed between IDA and ARDC. These restrictions, although severe, are nec-essary and already have led to some successful State-supported recoverydrives to avoid a reduction in lending programs.

14. Management is perhaps the largest factor contributing to poor LDBperformance and high overdues. It is imperative that management be upgradedand that LDB staff be improved in order to handle the increasing lending pro-gram and more complex financing. For that reason, an extensive LDB stafftraining program which started under ARDC I would be included in this project.Most LDB management staff are seconded from State government cooperativedepartments and are subject to transfer at any time. It would be advisablefor such staff to be on direct LDB establishment; this would provide betterjob satisfaction and more continuity. Similarly, it would be beneficial forLDBs to establish their own technical units to meet diversified lending needs.For this to be achieved, however, a wider interest spread would be required.

The Role of Reserve Bank of India (RBI)

15. The RBI has the main responsibility for developing the cooperativebanking structure over which it has statutory control. It has a specialAgricultural Credit Department whose functions are to: (i) study all ques-tions of agricultural credit and be available for consultation by centralgovernment, State government, SCB, and other banking organizations; and(ii) coordinate RBI agricultural credit operations and its relations withSCB and any other banks engaged in agricultural credit. The RBI conductsinspections of all cooperative banks, gives direction as to the purpose forwhich advances are to be made, authorizes the opening of new branches andcontrols the raising of funds from the issue of ordinary debentures.

Overdues

16. The overdues situation is serious and every effort should be madeto correct it as soon as possible. Provisional figures for 1975-76 suggestthat improvements have been made in a few States during the recent year, butgenerally, overdues have been increasing in the cooperative banking systemand in some cases have reached high levels. The RBI, GOI and other agencieshave been concerned over this problem; RBI appointed a study team to look intothe matter. The team reported that no one group of farmers was responsiblefor overdues but that all farmers, small, medium, and large, were similar inthis respect. It concluded that lack of will and discipline among these bor-rowers were the prime factors attributing to overdues. Deficiencies inlending policies and procedures, such as untimely credit, over-financing,and unrealistic due dates also contribute to the problem. State governmentsin some cases were instrumental in creating an unfavorable climate for recoveryof loans. Defaulters of cooperative loans were financed by some State govern-ments through taccavi loans. Some State governments subsequently decided to

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ANNEX 3Page 5

write off their agricultural loans and this also created a sense of compla-cency in the minds of borrowers from cooperatives. In some cases, membersof the Managing Committees of the cooperative have displayed an attitude ofindifference in the matter of recovery.

17. The team appointed by RBI recommended a number of steps to be takento gain control of this problem. Their recommendations included automaticdisqualification of Managing Committee/Board Members, denial of new creditand voting rights to defaulters, as well as amendments to the cooperativesocieties act in the various States empowering the Registrar of CooperativeSocieties to issue orders of his own motion to recover cooperative arrearsas land revenue. The team also took the position that defaulters shouldnot be financed by State governments, not even in the form of inputs. Veryoften there is a lack of bidders when defaulters' lands are put to auction.It was recommended, therefore, that concerned State governments purchase thelands in auction or set up a farming corporation which may take the landafter settling the debt, and dispose of it by sale or long-term lease. TheRBI has conveyed these recommendations to State governments and cooperativebanks.

18. The RBI and ARDC have invoked certain sanctions as discussed inparagraph 12. These sanctions, while restricting lending and, therefore,agricultural development in those areas which are served by cooperativelending institutions which have high overdues, should be helpful in gettingcooperative institutions to face up to their problems and to take correc-tive actions. Although there is extreme reluctance to do so, a policy onre-scheduling loans should be developed whereby the agricultural producercan be given more time to recover from adversities such as natural calam-ities, and meet loan repayments. The present policy of spreading a missedpayment over the next four years may not be an adequate solution. Perhapsit would be more beneficial to defer payments to the end of the loan therebygiving the borrower one or more additional years to meet the final repayment.However, caution must be exercised in administering such a policy.

19. Extension of credit on a sound basis is a prerequisite to collec-tion of loans. In addition, management must see that loans are properlysupervised, and remain alert to possible problems which might arise. Whendefaults occur, management must be willing and able to initiate action tocollect the loans. Cooperation of State governments and the judicial systemis essential to ensure a satisfactory level of recoveries.

III. Commercial Banks

20. Since the nationalization of major banks in 1969, commercial banks(CBs) have made significant progress in financing agriculture although it hastaken some time to develop staff expertise to handle agricultural loans.Bank branches have been established in rural areas to reach rural populationand to permit banks to better supervise credit. Additional bank branches are

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ANNEX 3Page 6

proposed and will further broaden CB network. Although relatively new toagricultural lending, CBs have become an important part of agriculturalfinance and complement the cooperative banking system. Since CBs haveacquired and trained a specialist staff and opened numerous branches,they are in a better position to play a more significant role in agricul-tural credit.

21. The CBs have been at a disadvantage with cooperative banks in suchmatters as right of recovery, stamp duty, registration fees, etc., and thisstill exists in some States. Appropriate legislation has been enacted inten States to correct inequities and draft bills are ready in seven moreStates. State governments also need to update land records and simplifyregistration of charges procedures.

Regional Rural Banks (RRB)

22. The GOI has proposed that 50 RRB be set up in various Districts toprovide loans to small farmers, agricultural laborers, rural artisans, smallentrepreneurs and persons of small means engaged in production. The RRB aresponsored by CB and capital is being subscribed by central government, Stategovernments and sponsoring banks. Several RRB have already commenced opera-tions. The RRB are scheduled commercial banks and can become members of ARDCand be eligible for refinance assistance. It is not anticipated, however,that these institutions will approach ARDC during their initial years ofexistence.

Village Adoption Scheme

23. The CBs have been adopting villages for intensive financing ofagriculture. Such a scheme not only permits banks to be in a position tomeet credit requirements for groups of farmers but also enables them tokeep a closer watch on end use of loans and to better supervise credit.

Agricultural Development Branches

24. The State Bank of India Group has launched a new strategy in agri-cultural lending by establishing Agricultural Development Branches in eachof the States. These provide comprehensive credit facilities for minorirrigation, land improvements, and seasonal requirements.

Farmers' Service Societies

25. The CBs have established 51 Farmer Service Societies mainly insmall farmer development areas in 12 States to provide farmers not onlycredit but also agricultural inputs and extension services at one location.This eliminates the need for farmers to approach several different agenciesand face possible constraints such as giving adequate security to differentinstitutions or incurring a multiplicity of service charges. As thesesocieties have only fairly recently been formed, it is too early yet toassess to what extent they are successful.

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ANNEX 3Page 7

Guarantees for Agricultural Loans

26. The Credit Guarantee Corporation of India, a subsidiary of RBI,provides guarantee cover to CBs for all types of agricultural loans grantedto eligible borrowers. The cover extends up to 75% of the outstanding balance.

Adoption of Primary Societies

27. Under this arrangement, which is in force from 1970/71, primaryagricultural cooperative societies have been ceded to CBs so that weak anddormant societies may be activated. This arrangement has enabled the CBto serve a cluster of borrowers through the medium of a society, and helpedthem to enlarge their coverage. Some 22 CBs are participating in the schemein eleven States. In all, 3,241 societies have been taken over of which1,831 have been financed.

Lead Bank Scheme

28. Each CB in the public sector and a few in the private sector havebeen assigned certain Districts in various States. The designated " leadbank" is responsible for surveying the District for potential bank develop-ment, branch extension and credit expansion. The banks are also expectedto conduct in-depth studies of limited areas in each District with a viewto drawing up developmental plans. The lead bank is expected to act as aconsortium leader to bring about a coordination of cooperative banking,commercial banking and other financial institutions.

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ANNEX 3Appendix 1Page 1

INDIA


Summary of the Main Recommendations of the Committee onIntegration of Cooperative Credit Institutions

1. The terms of reference of the Committee included:

(a) To review the position of the two wings of the coopera-tive credit structure in the different State/union ter-ritories and to examine whether integration of the twowings will be advisable from the point of view of serv-ing the objective of lending adequate support to themassive investment program in agriculture;

(b) To examine whether the integration may be brought aboutsimultaneously at all levels of the two wings of thecooperative credit structure or may it be done in aphased manner at the different levels;

(c) To examine the structure of management and the staffingpattern at the intermediate and higher levels of theintegrated units of the two wings of the cooperativecredit structure, so that they may be able to handlesatisfactorily short-term, medium-term and long-termagricultural credit;

(d) To examine, in particular, the organization and staffingpattern at the base level which is expected to deal withfarmers so that it may be able to integrate the differenttypes of credit with supplies of agricultural inputs,marketing of agricultural products, technical guidance,etc.;

(e) To examine the amendments necessary to the CooperativeSocieties Act, the Cooperative Land Development BanksAct, the rules framed thereunder, the Banking RegulationAct, 1949 (as applicable to cooperative societies),any other relevant laws, by-laws and the business rulesof the concerned institutions;

(f) To make recommendations on other related aspects, which,in the opinion of the Committee, are important.

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2. The principal recommendations of the Committee included:

(a) That the two wings of the cooperative credit structureshould be integrated at all levels, and that a periodof three years would be adequate to complete the integra-tion from the time a decision is taken to bring aboutintegration.

(b) That a special cadre of professional bankers be createdto man the post of chief executives (Managing Directors)in both the State Cooperative Development Banks andDistrict Cooperative Development Banks with clear divi-sion of functions between the chairmen and the chiefexecutives of the banks. The chief executive will bea full-time paid professional banker selected from thecadre suggested above and have qualifications comparableto those defined under section lOB of the Banking Regu-lation Act for the Chairman of the Board of Directorsof a banking company.

(c) That wherever the banks have to retain Government staff,pending appointment of their own staff, the control overthe Government staff should vest with the Banks and suchstaff should not be liable to frequent transfers. Insuitable cases, Government staff who have acquired exper-tise and are working in the banks may be absorbed in thebank's services.

(d) That to enable quick disposal of applications for termloans and preparation of credit limit statements for croploans, the system of "farmers' pass-books" as obtainedin certain States with constant updating is recommended.

(e) That wherever land cannot be offered as security,hypothecation of movable assets created out of loansgranted by the PCS should form the security for loans.Where even hypothecation of movables is not possible,as is the case with several small farmers and landlesslaborers, loans may be backed by group guarantees.

(f) Where land is available as security for loan, to simplifythe procedure for creating security in favor of the PCS,a new form of security should be created, i.e., a specialcharge to be known as GEHAN; this can be effected by a meredeclaration by the borrowers and at the same time wouldhave all the characteristics of a valid mortgage withoutits cumbersome formalities. The charge so created infavor of the society should be assigned in favor of thehigher financing agency for the purpose of obtaining ne-cessary resources for loaning. 74


INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPlENT CORPORATION CREDIT PROJECT

Summary and Recommendations of the Talwar Committee

The Governor of the Reserve Bank of India appointed, in September1969, an Expert Group with the following terms of reference:

(i) To examine the provisions of the State laws relating toabolition of intermediaries, land tenure and tenancy reformsand similar other enactments which confer different degreesof rights in land on the tenant-cultivators and landholdersbelonging to backward classes, tribals, etc., with particu-lar reference to right of transferability through sale ormortgage or right to create a charge on land/crops and tosuggest modifications, if any, required to facilitate theirdealings with the commercial banks;

(ii) To examine the State laws relating to agricultural debtrelief and regulation of moneylending, with particularreference to regulation of interest rates, scaling downof past debts, priority to charges among the differentcredit agencies, recovery of overdues, etc., and tosuggest modifications, if required, in favor of institu-tional credit agencies;

(iii) To exam-ine the provisions of the State legislation imposingceiling on land holdings, and to suggest modifications, ifany, in regard to lands coming into the possession of theinstitutional credit agencies, because of foreclosures;

(iv) To examine the provisions of various land reforms legisla-tion relating to the regulations on sale of land applicableto lands coming into the possession of institutional creditagencies during the process of recovery of loans in respectof: (a) categories of persons to whom agricultural landcould be sold, (b) the price at which land could be sold,(c) leasing out of land temporarily, (d) sale of fragments,(e) right of pre-emption of adjoining landholders, etc., andto suggest amendments or administrative measures for safe-guarding the interest of the institutional credit agencies;

(v) Other related measures/actions which will increase the com-mercial banks' participation in agricultural developmentprogram.

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A summary of the Group's recommendations is given below:

Legislative Provisions

Land Alienation Rights of Agriculturists

(i) Cultivators who have no rights or have only restrictedrights of alienation in their lands or interests therein -such as landholders belonging to schedule tribes/castes,backward classes/castes, tenant cultivators, fragmentholders, allottees of Bhoodan land and of Government land- should be vested with rights to alienate land/interestin land held by them in favor of banks for the purposeof obtaining loans for agricultural purposes;

(ii) In the case of share-croppers, who form a special cate-gory and who do not have any recorded rights in land, bankswould be able to grant loans only if their status is pro-perly recorded in the record of land rights. Further, theyshould be enabled to create a charge on the crops raisedby them, notwithstanding the fact that they are not theowners of the land over which the crop is raised by them.

Priority of Charges

(iii) The general principle of priority as between institutionalcredit agencies in regard to loans based on common security,should be as adumbrated in the Transfer of Property Act,1882. This will ensure that the concept of first charge infavor of cooperatives does not adversely affect commercialbanks. However, all institutional credit agencies shouldhave priority of charge vis-a-vis private credit agencies.

(iv) The restriction of alienation of land subject to a charge infavor of a cooperative should be relaxed so as to permit sub-sequent alienation thereof for securing supplementary creditfrom another institutional credit agency. This would besimilar to the provision by which property subject to acharge in favor of a cooperative credit society is allowedto be alienated in favor of a land development bank.

(v) On the same basis, where crop loan for current productionpurposes is granted by one institutional credit agency andterm loan for development purposes is granted by anotherinstitutional credit agency against common security,priority of security should accrue to the agency providingterm loan provided the encumbrance in its favor was made withthe knowledge and concurrence of the institution holding the

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encumbrance for crop loan for current production purposes.The existing priorities under the cooperative legislationas between the cooperative credit societies and land mort-gage banks will remain unaffected.

(vi) As between two institutional credit agencies providing termloans for development purposes against common security, priorityof claim should arise according to the point of time of creationof encumbrances.

(vii) On the analogy that the simplified procedure pertaining to thecreation of a charge on land/interest in land by declaration infavor of cooperatives facilitates expeditious disposal of loanapplications, provision should be made to enable agriculturiststo create a charge on land/interest therein by declaration infavor of commercial banks. Appropriate arrangements should alsobe made to have such charge noted in the record of rights andin the office of the Sub-Registrar.

(viii) To overcome the prolonged delays involved in securing registra-tion of mortgages created in favor of commercial banks, it isnecessary to provide that it would be sufficient if a copy ofthe mortgage deed is sent for registration to the Sub-Registrar.The mortgage so created should also be noted in the record ofrights.

Recovery and other Operational Difficulties

(ix) Enactments relating to moneylending regulation and debt reliefshould exclude commercial banks from their purview.

(x) To facilitate prompt recovery of dues of commercial bankswithout having to resort to protracted and time consuminglitigation in civil courts, the State Government shouldempower an official with authority to issue an order, havingthe force of a decree of a civil court, for payment of anysum due to a bank by sale of the property charged/mortgagedin favor of the bank.

(xi) As banks may have need to foreclose mortgages of land executedin their favor, bring the property to sale and purchase theproperty if there are no bidders at auctions conducted forthe purpose, they should be permitted to purchase the landand, if necessary, acquire land in excess of the ceiling limitfixed. However, State Governments may fix a time limit withinwhich land acquired by banks is to be sold. Ultimate disposalof land by banks will, of source, have to be subject to Stateenactments as regards the persons to whom the land can besold etc.

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(xii) In order to facilitate commercial banks financing agriculturiststhrough primary agricultural credit societies, the societiesshould be made eligible to borrow from commercial banks. Fur-ther, the commercial banks concerned should be eligible forsuch facilities as are ordinarily available to a centralcooperative bank.

Administrative Measures

(xiii) To enable banks to get adequate and reliable informationabout the operational holding of an intending borrower andthe nature of his interest therein to support his bonafideinterest in land and cultivation, the urgency to bring landrecords up-to-date has been reemphasized.

(xiv) Meanwhile, it is urgently necessary to prepare and maintaininterim registers indicating the existence of share-croppersand other informal tenants and the particulars of land cul-tivated by them; unless this is done, this class of cultiva-tors may not be able to get adequate support from institutionalcredit agencies.

(xv) As and when land records are brought up-to-date, pass bookssuch as those already in vogue in some States may be issuedby State Governments to owners and tenants so that such apass book can serve as prima facie evidence to the rights inland of an agriculturist and as a starting point to banks toverify such rights and details pertaining to encumbrancesthereon.

(xvi) Cultivators borrowing from commercial banks should be exemptedfrom payment of stamp duty, registration fee and charge forissue of non-ecumbrance certificate to the extent to whichthey are eligible for these concessions if they borrow fromcooperatives.

(xvii) The number of centers where equitable mortgages can be createdin favor of commercial banks for the purposes of agriculturalborrowing needs to be increased until such time as the legis-lative and other measures recommended by the Group are giveneffect to.

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Source: Report of the Expert Group on State Enactments having a bearingon Commercial Banks lending to Agriculture - Bombay, 1971.


INDIA


Review of Status of Agricultural Credit and AgriculturalCredit Institutions on a State by State Basis

A Statewise review of the organization for agricultural institu-tional credit and bottlenecks to credit flow are presented in the followingparagraphs:

(i) Andhra Pradesh

Short Term Cooperative Credit Structure

Twenty six district central cooperative banks (DCCB) have federatedto form a State cooperative bank (SCB) at apex level and credit requirementsare being met by nearly 15,000 primary affiliated agricultural cooperativecredit societies (PCS) at the village level. Twelve DCCB have, however, beenin the process of rehabilitation since 1972, which means that provision ofseasonal agricultural and marketing credit is hampered considerably and thiswill affect development. PCS have also been taken up for reorganization withthe ultimate aim of having only 7,000 viable units, each having a minimum loanbusiness of Rs 0.2 M. The Reserve Bank of India (RBI) has been watching thisprogram and is in touch with the State Government to speed up this process.

Long Term Cooperative Credit Structure

The long term cooperative credit structure consists of the AndhraPradesh Cooperative Central Agricultural Development Bank at the apex levelwith 201 primary agricultural credit development banks (PLDB) at villagelevel. PLDB operations, more particularly the recovery performance of thebanks during 1975-76, have been quite encouraging. No serious bottlenecksare envisaged in their ability to provide adequate credit.

Commercial Banks

The commercial banks (CB) have 1,539 branches in the State. Thedifficulties experienced by the commercial banking structure in the freeflow of agricultural credit in the State were: (a) inadequate coverage ofrural areas and rural population; and (b) paucity of trained personnel.The lead banks in the State have, however, taken initiative in identifyinggrowth centers with a view to opening branches either by themselves or withother banks. The inadequacy of trained personnel is also being overcomeby selection of suitable staff and giving them adequate training. The StateGovernment has already brought legal changes whereby CB are now placed on a

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par with the cooperative banks insofar as their lendings to cooperativesocieties are concerned. As regards their direct lendings, certain conces-sions on registration charges and on encumbrance certificates have also beenextended to all borrowers owning up to 5 acres of wet land or 10 acres of dryland irrespective of whether they borrowed from CB or cooperatives. The StateGovernment has also prepared a draft Bill on the lines of the recommendationsof the Talwar Committee (see Appendix 2).

(ii) Bihar


The Bihar State Cooperative Bank is functioning at the apex level,with 28 DCCB at central level, and 16,500 PCS at village level. The entireintermediary tier comprising 28 DCCB has been identified as weak. Sixteenbanks have been taken up for rehabilitation under the central sector planwith the approval of the Government of India (GOI). The high level of over-dues and low operational efficiency has been responsible for the slow progressof cooperative credit. However, the recovery performance of DCCB is reportedto have considerably improved in 1975-76 enabling many of these banks tobecome eligible for credit limits from RBI in the current year.


The Bihar Rajya Sahakari Bhoomi Vikas Bank Ltd., has a network of124 branches. The bank issued loans of the order of Rs 162.2 M in 1975-76.The overdues of these banks which were 34% in 1974-75 came down to 28% in1975-76. As many as 116 branches are now eligible for unrestricted lendingafter taking into account the State Government contribution to equity up to10% of demand. A notable defect in the system is that key personnel are drawnfrom the various departments of the State Government and as a result LDBcontrol over them is limited. An Ordinance issued by the State Government inDecember 1975, does not facilitate diversification of lendings by LDB. Asection of the Ordinance, by implication, requires LDB to provide loans onlyfor purposes connected with land.

Commercial Banks

At the end of June 1976, there were 953 CB branches of which 414were in rural centers. Further proposals are under way to open about 350offices in the State, mostly in the unbanked rural and semi-urban and urbancenters. Two regional rural banks (RRB) have also been established. During1975, CB advanced Rs 248.5 M as direct advances, and Rs 66.5 M as indirectadvances for agriculture. Of the direct advances, nearly 80% were granted foracquiring farm machinery such as tractors, pumpsets, and installation oftubewells.

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Difficulties of Commercial Banks

The recommendations of the Talwar Committee have been accepted onlypartially. The State Government is expected to promulgate an Ordinance some-what on the lines recommended by the Talwar Committee so that similar facil-ities are available to all institutions in providing agricultural credit. Thepaucity of trained staff and inadequate staff of the branches in rural areasis another difficulty. To overcome this, CB staff are trained in the agricul-tural project courses organized as part of ARC Credit Project (ARDC I) atCollege of Agricultural Banking, Poona for senior and middle level staff.

Problems Common to All Institutions

(a) The State has frequently been ravaged by floods which hashindered regular flow of bank credit to agriculture and contributed tooverdues. (b) There has been delay in consolidation of land holdings andconsequently the small and marginal farmers, who are scattered, are pre-vented from taking advantage of long term investment credit from banks. (c)Farmers' response to switch over to new technology is poor. This underlinesthe need for extension support.

(iii) Gujarat


The short term credit structure in the State is fairly strong.


The Gujarat State Land Development Bank (SLDB) has 182 branchescovering the entire State. During the past two years, a high level of over-dues has caused a setback in the loan business of the bank. The SLDB obtainedonly Rs 35 M refinance from ARDC during the last two years. The poor recoveryperformance could, by and large, be traced to drought conditions prevailing inmost parts of the State. The facility of rescheduling of loans in the droughtaffected areas has not been availed of fully. The recovery performance ofSLDB at 56.3% of the demand at the end of 1975-76 is better as compared toabout 46% at the end of the previous year. Recently, RBI also recommendedthat the SLDB reschedule loans in the drought affected areas so that overduesreflect the true position. One of the constraints of SLDB is that all itsloans, under its Act, require to be secured by mortgage of immovable proper-ties and this inhibits the bank from lending for diversified non-land basedinvestments.

Commercial Banks

At the end of June 1975, 1,166 CB branches were operating in 19 dis-tricts of the State. The State Government has generally been averse to CBfinancing long term investments in agriculture. The recommendations of theTalwar Committee L..- -1- to be given effect to, hence CB do not enjoy thesame facilities as those of cooperative banks.

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(iv) Haryana


Twelve DCCB have federated to form the Haryana State CooperativeBank Ltd. at the apex level. 2,138 PCS are functioning and all the soci-eties are viable having a minimum loan business of Rs 0.3 M each; which ismore than the RBI recommended level of Rs 0.2 M. The structure is quitestrong and can be expected to take care of the seasonal credit and marketingrequirements of farmers.


The Haryana State Land Development Bank Ltd. has 29 PLDB. One ofthe features of the working of the LDB system has been the consistently goodperformance by LDB in the matter of recovery of loans. SLDB implemented asubstantial part of the IDA Agricultural Credit project for minor irrigationand farm mechanization in the State. The main difficulty faced by LDB hasbeen the depletion of underground water resources in certain parts of theState, thereby, placing limitations on the expansion of LDB business. Diver-sification of its lendings is necessary if the volume of operations is to beat a stable level. A constraint is that the SLDB Act permits only loansagainst mortgage of landed security.

Commercial Banks

390 branches of scheduled CB are functioning in the State, of which158 are operating in rural areas. The State Government has passed legislationgiving effect to the recommendations of the Talwar Committee. The State Gov-ernment has also frequently reviewed the implementation of ARDC schemes andassisted in the removal of bottlenecks.

(v) Jammu & Kashmir


There are three DCCB operating in the State, besides the Jammu &Kashmir State Cooperative Bank Ltd., at the apex bank level. All three DCCBhave been identified as weak and consequently require rehabilitation. Pro-duction and marketing credit is, therefore, a problem. This matter is beingpursued by RBI.

Long Term Credit Cooperative Structure

The Jammu & Kashmir Cooperative Central Land Development Bank isserving the State through its 21 branches. Because of the existence of ahigh level of overdues, the operations of the bank have been at a low key.

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Commercial BanksThere are 232 CB branches. The State Government has not taken any

action to implement the Talwar Committee's recommendations.

Common Problems

No assessment of groundwater resources has been made. Land holdingsare small. The State is surplus in fruits and other horticultural produce, andmarketing is a problem because of the nature of terrain and transport problems.These constraints inhibit flow of term credit.

(vi) Karnataka


The reorganization of PCS has been taken up by State Government. Itis expected that the number of societies which are at present 8,300, will bebrought down to 4,300 viable societies. This is expected to lead to smootherflow of cooperative credit.


The Karnataka State Cooperative Land Development Bank Ltd., has 176PLDB affiliated to it. The Bank floated debentures of the order of Rs 184 Min 1975-76 exceeding considerably the previous year's achievement of Rs 114 M.Out of 176 PLDB, only 119 are entitled to unrestricted lending program anddue to high overdues the others will have a reduced lending program. Diver-sification of lending operations of the bank is hampered by the provision inthe Statute which stipulates creation of mortgage of land as security for allloans.

Commercial Banks

There were 1,852 CB branches as on March 26, 1976 functioning in theState. The State Government has accepted the recommendations of the TalwarCommittee and has enacted Karnataka Agricultural Credit Operations and Miscel-laneous Provisions Act, 1974. This enactment has, by and large, removedconstraints for CB flow of credit to agriculture.

Common Problems Inhibiting Flow of Credit

Preponderance of small holdings is noticed in this State. About 30%of the holdings are of a size of 1 ha and below. 88 taluks in 12 districtsare drought affected and programs are to be specially tailored to those areas.Technical guidance from extension services is reported to be inadequate.

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(vii) Kerala


The Kerala State Cooperative Bank has 11 DCCB affiliated to it with1,731 PCS at the village level. An RBI committee examined the justificationfor continuance of DCCB. Taking note of their financial position and organi-zational arrangements, the committee felt that DCCB were not equipped to takeup the responsibility of direct financing in a large area and a five year timelimit has been recommended for improving their operations. PCS have beentaken up for reorganization. When this program is completed, there would be1,600 viable societies. Recently, another committee has recommended theconversion of about 168 societies as farmers' service societies.


The long term cooperative structure is federal and there are 30 PLDBfunctioning in addition to the SLDB. These banks had disbursed loans of theorder of Rs 34.6 M at the end of June 1975, and the recovery performance hasbeen encouraging. Although the Kerala Cooperative Land Mortgages Banks Act,1960, as such, does not stipulate grant loans for purposes of acquisition ofland and land improvements only, the byelaws of the bank restrict the grantingof loans only for land and land improvement purposes. To diversify the lend-ing operations of the banks, the byelaws would have to be amended.

Commercial Banks

At the end of July 1976, 11 districts of Kerala had 1,474 CBbranches. In view of the small land holdings in Kerala, there have beenlimitations for investment credit for agriculture such as farm mechanizationequipment. CB are yet to make agricultural credit on an 'area' basis on asizeable scale. The State Government has not so far implemented the recom-mendations of the Talwar Committee. The number of places where equitablemortgages can be created is also limited.

(viii) Madhya Pradesh


The Madhya Pradesh State Cooperative Bank has 43 DCCB affiliated toit. At the base level there are 9,651 PCS. The working of the short termcredit structure was reviewed by an RBI committee and a program of action hasbeen suggested.


The long term cooperative credit structure in Madhya Pradesh isfederal with 45 PLDB at district level. There has been a steady growth ofLDB business and there has also been an improvement in the number of brancheswhich are eligible for unrestricted lending during the current year.

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Commercial Banks

Madhya Pradesh is served by 1,013 branches of CB and the populationcovered per branch is about 42,000 as against 116,000 per branch at the end ofJune, 1969. The opening of new branches and appointment of special staff foragricultural credit, better coordination between the banks and improved exten-sion services have enabled CB to lend more for agricultural investment. TheState Government has implemented the recommendations of the Talwar Committeegiving CB further momentum in agricultural lending. Under the IDA Agricul-tural Credit Project, CB have been given a sizable share of the lendingprogram.

Problems Inhibiting the Flow of Credit

The main difficulties experienced by the banks in agriculturallending are: (a) Adequate assistance from extension agencies is not alwaysavailable to CB. Identification of borrowers and canvassing of loan appli-cations is not done by the Agriculture Department to the extent required.(b) Land records are not up to date in some cases. (c) Verification ofutilization of loans given by LDB is done by the State Government departmentand there is delay in furnishing of utilization verification certificatesleading to delay in the disbursement of subsequent installments.

(ix) Maharashtra


The Maharashtra State Cooperative Bank has 26 DCCB affiliated to itand there are 19,495 PCS at village level. An RBI study team examined theworking of the short term cooperative credit structure and recommended thatthe SCB may finance PCS directly, bypassing DCCB in areas where the magnitudeof the credit gap was large. 9 DCCB are under a rehabilitation program drawnup by GOI in consultation with RBI. In the context of the poor recovery per-formance of the village societies, the scheme of reorganization of the socie-ties with full time qualified trained secretaries has also been suggested.The State Government has drawn up a program of amalgamation/liquidation ofnon-viable societies and this is likely to be completed by June, 1977.


The long term cooperative credit structure is unitary and theMaharashtra State Cooperative Land Development Bank Ltd., functions throughits 27 branches and 271 sub-branches. One of the disquieting features of theworking of the long term structure is the high level of overdues, attributedpartly due to the vagaries of nature. The IDA Supervision Mission whichvisited Maharashtra in December, 1975 had recommended that the LDB should:(a) make determined efforts to improve recoveries; (b) review its interestrates to ensure a spread adequate to meet administrative expenses and to


maintain acceptable reserves; (c) to review its organization with a view toreducing its administrative expenses; and (d) write off bad debts consideredby the commitc..E which looked into the problem of overdues to be irrecoverable,and create adequate reserves for bad and doubtful debts. The LDB is takingsteps to remedy the situation and the ARDC has also been following it up sothat speedy solutions could be arrived at. The State Government has recentlyagreed that dairy development is one of the purposes for which LDB can advanceloans.

Commercial Banks

Maharashtra is served by a good network of 2,381 CB branches. Theworking of the lead bank scheme was recently reviewed by RBI and certain defi-ciencies in its oparation, such as slow progress in regard to formulation ofdistrict credit plans, ineffective linkages between the lead bank and theoperating banks and government agencies, and lack of appreciation on the partof government officials to propose suitable projects have come to light. Anumber of suggestions have been offered for ensuring effective operation ofthe scheme with emphasis on formulation of bankable schemes dovetailed to dis-trict development plans, SFDA program etc. Despite these deficiencies in theworking of the lead bank schemes, some CB have made notable progress, partic-ularly under ARDC refinanced schemes. The State Government has also acceptedand given effect to the recommendations of the Talwar Committee. The rele-vant Act extends to CB special privileges available to cooperatives under theMaharashtra State Cooperative Societies Act in the matter of creation ofcharges, recovery of dues by banks, and settlement of disputes through arbi-tration, etc.

(x) Orissa


The short term cooperative credit structure in Orissa comprisesthe Orissa State Cooperative Bank at the state level, 17 DCCB covering 13districts and 3,352 PCS. The working of the short term credit structure hascertain weaknesses such as: (a) inadequate distribution of PSC; (b) low mem-bership; (c) poor loan recovery; (d) managerial inadequacy; and (e) unsatis-factory financial performance and lengthy administrative formalities.


The Orissa State Land Development Bank has 55 PLDB affiliated to it.There has been some improvement in the performance of the SLDB and the PLDBduring the past two years. The recovery position of these banks has also beengood. As mortgage of land is essential for loans from LDB, the SLDB cannotlend for diversified purposes without amendment to the relative Act. Thestudy team constituted by RBI to prepare a Banking Plan for the IDA EasternRegion Foodgrain Project has made a number of recommendations to improve theworking of LDB and for facilitating greater involvement by CB in term lending.

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Commercial Banks

Fourteen major CB are operating in the State through 356 branches.The population coverage of these banks is about 62,000. CB have been envinc-ing keen interest in lending for agricultural investment more particularlyunder the ARDC schemes. The bulk of the refinance sanctioned by ARDC toCB has been for minor irrigation investments to be implemented by the OrissaLift Irrigation Corporation. There has been a progressive increase in thenumber of CB branches in the eastern States, including Orissa. The StateGovernment has enacted the Agricultural Credit Operations and MiscellaneousProvision (Banks) Act, 1975 on the lines recommended by the Talwar Committeemaking available to CB borrowers the same facilities as are admissible to thecooperatives. The rules under this Act are being framed.

Common Problems

The existence of unsurveyed land in some districts has tended todiscourage institutional lending. Unless legislative provisions to protectthe interests of the banks are taken they may not come forward to extendcredit on a larger scale. An RBI study team has recommended the enactment oflegislation towards removing this lacuna and the State Government is activelyconsidering the proposal. About 38% of the population in Orissa constitutesnomadic tribals. The scheme of development for the betterment of the tribalsshould be designed to tie up the interest of tribals with developed lands.This is being explored. As part of the IDA Eastern Region Foodgrains Project,the institutional credit system in Orissa was reviewed by ARDC. The IDAMission has proposed a timebound action program for accelerating the tempo ofagricultural lending in the State. The ARDC study team report has beenaccepted by the State Government and action would emerge on the basis ofrecommendations which would pave way for faster agricultural development.

(xi) Punjab

Short Term Cooperative C-redit Structure

At the apex level, the Punjab State Cooperative Bank is functioning,while 17 DCCB having 225 branches are operating at the intermediate level.There are about 11,000 PCS. Punjab has a high proportion of weak DCCB. Thehigh level of overdues has been hampering the flow of credit especially fromRBI.


The Punjab State Cooperative Land Mortgage Bank Ltd., has 42 PLDBaffiliated to it. Due to continuous exploitation of groundwater resources inthe past, there has been a tapering of demand for minor irrigation investments.There is urgent need for LDB to explore scope for schemes aimed at betterwater management and for diversified purposes.

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AN4NEX 3Appendix 3Page 10

Commercial Banks

870 CB are operating in the State. CB have been actively partici-pating in the Punjab Agricultural Credit Program which is entirely for farmmechanization. The only limiting factor in the case of CB is that the StateGovernment is yet to give effect to the recommendations of the Talwar Com-mittee. Recently the State Government has promised to take necessary actionin this regard.

(xii) Rajasthan

The entire State is subject to extreme climatic conditions with9 districts drought prone. In 5 districts there is a heavy concentrationof tribal population. These factors affect investment opportunities.


RBI had made a detailed study of the working of the short termcooperative credit structure and has recommended the merger of a few weak DCCBand also a program of reorganization of PCS. The RBI report has been acceptedby the State Government. The work relating to reorganization of societies isto be completed in a phased manner.


The long term cooperative credit structure is a two tier system,viz., the State land development bank at State level and PLDB at districtor taluka level. During 1975-76, PDB recovery performance has been good.As many as 33 out of a total of 35 PLDB are now eligible for unrestrictedlending after taking into account the State Government contribution to equity.This improved recovery performance gives impetus to LDB to lend on a largerscale. An RBI proposal for a Management Trainee scheme has also been imple-mented by the bank. An RBI senior executive has been appointed Chief Exec-utive of the SLDB. As in the case of several other LDB, the statutoryrequirement of mortgage of land prevents diversification of LDB lendingoperations.

Commercial Banks

23 CB are operating in the State with a network of 861 branches.At the end of December 1975 these banks had outstanding agricultural loansof about Rs 295 M. The State government has enacted Rajasthan AgriculturalCredit Operation (Removal of Difficulties) Act and consequently CB have beenDlaced on par with cooperative banks in the matter of financing agriculture.

Problems Common to Banks

(a) Inadequate extension support is mainly responsible for poordemand for investments. (b) Slow pace of electrification delays energization

88


of pumpsets. (c) Greater care is required to be exercised in the furtherexploitation of underground water resources in certain parts of the districtsof Barmer, Ganganagar, Jaisalmer, Jalore, Jodhpur and Pali districts.

(xiii) Tamil Nadu

The short term cooperative credit structure in the State comprisingthe Tamil Nadu State Cooperative Bank, 16 DCCB and 5,056 PCS is inherentlystrong. The necessary performance of these banks has also been good and thesystem could be expected to sustain a sizeable lending program.


The State land development bank has 223 LDB affiliated to it. Be-cause of drought conditions there has been a severe set-back in PLDB recoveryperformance and it is understood that the bank is likely to reschedule theseloans. LDB Act stipulates that loans by LDB should be only for purposespertaining to development of land as may be prescribed, and against mortgageof land. As such, diversification of lending by LDB is not possible.

Commercial Banks

There are 1,983 CB branches in the State. CB have been precludedfrom lending for minor irrigation investments as a matter of governmentalpolicy; this has reduced the volume of their business. CB advances have beenfor diversified purposes such as plantations, fisheries, etc. The StateGovernment is yet to implement the recommendation of Talwar Committee; RBIhas taken this up with the State Government.

(xiv) Uttar Pradesh

There are 55 DCCB in Uttar Pradesh with the Apex Cooperative bankat the State level. Short term requirements of farmers are met by nearly22,000 PCS at the village level. Recently, the State Government launched aprogram of reorganization of PCS. After the reorganization is completed,the number of viable societies would be brought down to nearly 8,000. Therecovery performances of DCCB in 1975-76 have been satisfactory. Conse-quently, all the banks are eligible for credit limit from RBI. Some of theidentified weak cooperatives have been brought under a rehabilitation program.


The Uttar Pradesh SLDB functions through 209 branches. Thesebranches have maintained good recovery performance in 1975-76 and as many as204 branches are entitled to unrestricted lending program in the current year.Before the launching of the UP Agricultural Credit Project, LDB had certainconstraints such as non-involvement in scheme formulation, inadequate technicalperformance, and inadequate staff for processing of loan applications. Thesedeficiencies have since been corrected and the banks have been participating inthe UP Agricultural Credit Project on a large scale.

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Commercial Banks

Uttar Pradesh is served by 2,187 CB branches of which nearly 928branches are in the rural areas. The main problem of CB relates to the pau-city of trained staff, inadequate branch network in rural areas, and lack ofcoordination with Government Departments. The RBI branch licensing policylays stress on CB extending their branch network. With the advent of the UPAgricultural Credit Project where CB have been given a sizeable program, someof the banks have made notable progress in the recruitment of specializedstaff with a view to expanding agricultural credit. The State has alsoenacted legislation giving effect to the recommendations of the Talwar Com-mittee. Six regional banks are functioning in the State, and four more arelikely to be set up soon. The institutional credit system is strong forthe lending for agriculture in the State. However, for both LDB, and CB,the necessary extension support from Government agencies is inadequate.

(xv) West Bengal

The cooperative credit structure is weak. The CB branch expansionprogram has been tailored towards opening more branches in the underbanked,unbanked areas, especially in the eastern regions of the country. Conse-quently, the number of CB rural branches in West Bengal is increasing.Fragmented land holdings have been causing some difficulty in the extensionof institutional credit for agriculture. Other bottlenecks relate to heavyoverdues of cooperatives, the lack of ownership rights on cultivated land,non-availability of trained personnel and inadequate extension support fromthe State Government. The agricultural extension service in the State hasbeen recently reorganized and the system is reported to be working verysatisfactorily. This will give momentum for institutional lending for agri-culture. One of the notable features in 1975-76 has been the recovery per-formance of PLDB; 22 PLDB out of a total of 26 are now eligible for unre-stricted lending.

North-Eastern States

(xvi) Assam


The short term cooperative credit structure in Assam consists ofthe Apex Cooperative Bank and seven DCCB at district level. The system isvery weak because of poor operational efficiency and low recovery performance.664 Gaon Panchayat level societies have been set up by the State Government,replacing the old PCS. These socities are mostly dealing in distribution ofessential commodities and the agricultural loans advanced by them are only forfinancing high yielding seed varieties. An action program suggested by RBI forrecoveries has not been fully implemented. All the DCCB are weak and dormant.

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The long term credit structure is federal with 16 PLDB affiliatedto the Apex bank. The structure has been beset with the same problems as theshort term credit stucture, viz., poor operational efficency and low recoveryperformance.

Commercial Banks

At the end of June 1976, 271 CB branches were operating in theState. These banks have extended direct and indirect agricultural advancesof the order of Rs 18 M. The State Government has prepared a Bill on thelines recommended by that Talwar Committee to facilitate adequate flow ofcredit for agricultural development.

Problems Common to Banks

Much remains to be done in the State with regard to updating of landrecords, exempting CB from the provisions of Assam Fixation of Ceiling of LandHoldings Act 1956, and increasing the number of notified towns where equitablemortgages can be created. Transport bottlenecks and poor extension serviceshave also contributed to the poor development of the region. Land recordsare not up to date. There is no focal point of contact at the State Govern-ment level for bringing about coordination among the various government de-partments in the formulation of agricultural development schemes as well asin their implementation. In North Cacher Hills and Mikhir Hills districtswere tribals predominate, the tribals have no alienable rights over landscultivated by them. The IDA Eastern Region Foodgrains Project covers theState of Assam and a detailed study on the institutional system has beencompleted by ARDC. Based on the findings of the study team, an action boundprogram to revitalize the institutional system in the State would emerge.

Other Northern States

As in Assam, the north eastern region comprising the States ofManipur, Nagaland, Arunachal Pradesh and Tripura have been beset with iden-tical problems viz., weak cooperative credit structure and inadequate coverageby CB branches. The RBI branch licensing policy has been stressing the needfor opening more branches in the backward regions of the country includingthose in the north eastern region. Consequently, there has been gradualincrease in the number of CB branches in these regions. One of the problemsin this region that is retarding institutional credit for agriculture is theprevalence of Jhumming (shifting cultivation). Another relates to the landtenure system. In some areas of this region, lands are under the control ofvillage level councils who allot them for Jhumming purposes. Lack of mortgagerights in respect of these lands has been the pressing difficulty. Lack ofcommunications is also hindering the progress of agricultural credit. It hasbeen the endeavor of ARDC as well as the various agencies to penetrate into

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this region. ARDC had conducted pre-investment surveys and has been encourag-ing CB to take up schemes on the basis of these studies and avail itself ofrefinance facilities. In this region, institutional credit is bound to beslow, but of late some progress has been discernable in some parts, such asManipur, Tripura and Nagaland.

Source: Agricultural Refinance and Development Corporation.

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INDIA


Interest Rates in India

INTRODUCTION, SUMMARY AND CONCLUSIONS

1. An important issue relating to the Second ARDC Credit project is theadequacy of interest rates on State Land Development Bank (SLDB) lending ofARDC funds. Two distinct problems were raised in this connection: (i) theeconomy wide issue of the effect of borrowing and lending rates on resourcemobilization and efficient resource allocation; and (ii) the project specificissue of the adequacy of the spread between borrowing and lending rates forthe financial viability of the SLDB and commercial banks (CB), which are themain recipients of ARDC funds.

2. A survey of the economy-wide issues confirms the complexity of thedetailed analysis required to justify changes in specific interest rates inIndia. To treat adequately the complicated term structure of interest ratesin India, the inter-sectoral variations in rates, and the definition andadequacy of "real" rates is a major undertaking that has not been attempted.However, initial consideration of these factors does seem to indicate thatnone presently pose serious problems for the functioning of the Indian economy.Furthermore, marginal changes in interest rates are likely to have very littleimpact on the overall allocation of investable funds in India with its largepublic and joint sectors in which direct allocations of investment predomi-nate. Therefore, in the context of this project it is recommended that theBank not get involved in questions relating to India's overall interest ratestructure.

3. The micro or project-related issues revolve around: (i) the longterm viability of rural lending institutions, specifically, the Land Develop-ment Banks (LDB); and (ii) the determination of appropriate rates of interestfor farmers. Institutional viability depends on the spread between borrowingand lending rates relative to the administrative costs of the institution.The future viability of the institutions can be directly anticipated fromthe relation between the marginal and average spread. On the basis of thebest available evidence for LDB in India, the marginal spread is less thanthe average spread, which implies that some adjustment in the lending ratemust eventually be made if LDB are to remain financially independent. Althoughnot the preferred alternative, this objective could also be met through StateGovernment financial guarantees to the LDB, directly or indirectly reducingtheir cost of funds. No conclusions are reached here concerning the sociallyoptimal allocation of administrative expenditures, but conformity to a single

93


agreed standard is desirable in order to establish a firm criteria of via-bility. A movement toward lending rate uniformity between LDB and CB alsoappears justifiei. Consequently, it is recommended that GOI and ARDC com-plete a study of the project-related issues and implement suitable correctivemeasures.

ECONOMY-WIDE ISSUES

4. The economy-wide issues focus on the role of interest rates in re-source mobilization and allocation, specifically the objectives of GOI inte-rest rate policy and its effect on Government borrowing, inter-sectoralresource allocation, and the distribution of income. These issues must beconsidered in the context of the real level of interest rates, taking intoaccount price inflation. Finally, one must consider the practical importanceof interest rates, in terms of the actual proportion of investable resourceswhich could be affected one way or the other by policy changes.

DISCUSSION OF ECONOMY-WIDE ISSUES

5. Theoretical Observations. In a market economy, an observed interestrate may be considered as the sum of three parts: (i) the economic rate ofinterest which reflects factors associated with the inter-temporal allocationof real resources; (ii) a general appreciation factor which adjusts for actualor anticipated changes in the value of the investment instrument due to changesin interest rates or general inflation; and (iii) a risk premium which com-pensates the lender for the likelihood of default or difficulty of obtainingrepayment of either interest or principal. The allocative functions of theinterest rate are to elicit correspondence between planned saving and invest-ment in the economy, and to provide a criterion for the minimum acceptableproductivity of investment opportunities. As the price of capital, the inte-rest rate also helps to determine the functional and personal distributionof income. Especially apropos to the Indian context is the general proposi-tion that in an economy with given distortions, either in product or factormarkets, unilateral adjustments toward optimality in a single market (e.g.the capital market) may well be welfare reducing for the economy as a whole.

6. The Structure and Possible Functions of Interest Rates in India.Varying actual rates of interest in India reflect not only the factors iden-tified above but also other, often mutually inconsistent, objectives of theGovernment. For example, though interest on national debt only representsthe nation's future obligation to itself, there are understandable budgetaryreasons why the Government would wish to minimize the cost of Governmentborrowing (particularly when the revenue elasticity of the tax system is low).This objective is reflected in the 4.6% treasury bill rate and the range of5.0 to 6.0% on long term issues of GOI securities.

7. Second, the Government may wish to influence interest rates dif-ferentially to affect the inter-sectoral allocation of resources. This mayreflect an a priori judgement that one sector ought to be more capital inten-sive than another. In India there is little inter-sectoral distortion, as

94


the differentials between rates charged by institutions lending primarily toagriculture and those leading primarily to industry are insignificant. ICICIand IDBI lend to industry at 11%, IFCI to agro-industry and industry at 12%,SLDB for agricultural purposes at 11%. 1/ However GOI's recently announcedmodernization program for industry will make US$1.6 billion available forapproved schemes at concessional rates of 7.5%.

8. A third objective of GOI interest rate policy seems to be the trans-fer of resources to favored target groups. For example, small businesses,exporters, and small farmers all benefit from apparently subsidized creditfor some, though not all, types of borrowing: the ceiling of SFC loans tosmall enterprises is 11% as opposed to the normal ceiling of 14.5%, and ex-port credit on deferred payments may be obtained at 8%. To the extent thisprocedure reflects a desire simply to transfer income, subsidized interestrates are a dubious instrument. However, such subsidies may also reflect aperception on the part of Government that social returns to investment exceedprivate returns for such groups, so that at the "market" rate of interest in-sufficient investment occurs. This is a theoretically valid argument butobviously subject to case by case verification.

9. Finally, variations in the interest rate structure may reflectinter-sectoral differences in the rates required to mobilize savings. How-ever, rigidities on the savings side do not, in a reasonably integrated eco-nomy such as India's, imply that sector lending rates should correspond tosector borrowing rates. Specifically the issuing of special "rural develop-ment" debentures at 12% to mobilize "rural" savings does not imply that agri-cultural lending should earn a margin on that particular rate in isolationfrom lending and borrowing rates in other sectors.

10. Adjustment for Inflation. The consequences of this interest ratestructure are further complicated by the relation between the pure economicrate of return and the appreciation factor increases. If the pure or realeconomic rate of return is to retain any allocative role then nominal in-terest rates must increase by the extent of the appreciation factor (which,unfortunately, is not generally equivalent to short-run changes of any parti-cular price index). Determining the true "real" rate of interest thus be-comes a treacherous exercise. It is, nonetheless, important and some indica-tion being more valuable than none, one may compare the short term bank de-posit rates adjusted for annual rates of wholesale price inflation to getsome idea of the movement of nominal versus real rates of interest in Indiasince 1970:

1/ These rates are those quoted in the Reserve Bank of India, Report onCurrency and Finance, 1975-76. They are simplified for comparative pur-poses in that no distinction is made between local and foreign currencyrates, the latter including an exchange risk element. Industrial loansfinanced by World Bank lending to DFC's suah as IDBI are made at some-what different rates than those pertaining to the sector in general butstill within a comparable range.

95


INDIA: Nominal versus Real Short term Interest Rates (%)

1970/71 1971/72 1972/73 1973/74 19I4i75 1975/76

Bank Deposit Rate 5.0 6.0 6.0 7.0 9.0 9.0

Wholesale Price Inflation 5.5 4.0 9.9 22.7 23.1 -3.3(Monthly Average)

Real Short term Rates -0.5 2.0 -3.9 -15.7 -14.1 12.3

Clearly, increasing nominal rates combined with a decreasing price level in1975/76 have produced a pronounced shift in real short term rates. The cur-rent prospects for reasonable price stability are probably firm enough toassure that long term real rates (which are nominally higher) have moved ina similar direction. Thus, the current structure of real interest rates inIndia seems to reflect a reasonable notion of the opportunity costs of capital.

11. The Allocative Domain of Interest Rates in India. Leaving asidethe multiple objectives of interest rate policies and the present adequacy of"real" rates, one should consider, in the Indian context, the importance ofinterest rates as allocative mechanisms. Of total net savings in financialassets of Rs 36,473 M in 1972/73, 30% represented savings of the public sector,5% from the domestic corporate sector, and the remaining 65% frm the house-hold sector. Between 1960/61 and 1972/73, savings from the domestic corporatesector grew slowly at an average of 4.7% p.a. followed by public savings at13.5% p.a. and household net savings at 16.7% p.a. 1/ While the share of pub-lic savings is significant and does limit the domain over which interest ratesmight be expected to affect resource mobilization, the role of the publicsector in investment allocation is even greater. A back-of-the envelope cal-culation of gross capital formation in industry and trade in 1974/75 indi-cates that capital formation of commercial undertakings from central govern-ment sources considerably exceeded the amounts raised through capital issuesor loans from banks or other important lending institutions. 2/ Thus theactual allocation of investment funds is influenced greatly by direct Govern-ment allocations in which the market clearing function of interest rates isobviated by bureaucratic decision-making. The operation of the industriallicensing system and the effective rationing of credit through administrativeprocedures also diminishes the allocative importance of interest rates.

1/ Reserve Bank of India, Report on Currency & Finance, Volume II, 1975-76.

2/ This calculation involved a comparison of direct GOI capital formationto commercial enterprises (presumably public or joint undertakings) in1974/75 and an estimate of private capital formation on the basis ofcapital issues, loans from banks, public debentures, and loans from otherterm lending institutions (ICICI, IDBI, IFCI, etc.). The latter is anoverestimate of the private share since some of the funds from theseinstitutions are lent to public or joint enterprises. 96


CONCLUSION ON ECONOMY-WIDE ISSUES

12. The structure and level of interest rates in the Indian economyare neither so greatly out of line with reality nor do they have sufficientimpact on resource allocation as to warrant considerable effort at finetuning.

PROJECT-RELATED ISSUES

13. Moving to the specific issues directly related to the second ARDCCredit project does not, unfortunately, reduce the complexity or tractabilityof the problems. The major issue is the viability and quality of the insti-tutions affected by the project, namely the ARDC and LDB. Subsidiary to thisissue is the question of the efficient incidence of administrative costs inagricultural credit operations. When these costs vary systematically betweenclasses of borrowers (e.g. higher costs of lending for small-versus large-scale farmers), the issue is further complicated by the cross-subsidizationimplicit in a uniform lending rate. A final issue is the dispersion of in-terest rates among different institutions engaging in long term lending inagriculture.

DISCUSSION OF PROJECT-RELATED ISSUES

14. Institutional Viability. Concern has been expressed that the SLDBwhich, along with CB function as the conduit for ARDC funds, generally cannotadequately improve the quality of their operations without sufficient fundsto maintain permanent qualified professional staff. 1/ The current marginof SLDB borrowing and subsequent re-lending is thought to be insufficient tomeet such objectives, though otherwise the short-run financial viability ofthe SLDB is not in question. However, general questions on the long-run ade-quacy of the interest rate spread for agricultural lending institutions havebeen raised in a report by C.D. Datey. 2/

15. Over 75% of ARDC disbursements have been made to the SLDB throughARDC's subscription of "special development debentures" issued by the SLDB.These debentures are related to scheme lending under specific ARDC sponsoredprojects and carry a slightly higher rate of interest than the ordinary de-bentures issued by the SLDB. Currently, the special development debenturesconstitute approximately 50% of funds for the SLDB. It is anticipated that

1/ Currently many SLDB officials are seconded from State Governmentpositions on short term contracts with virtually no career interest inSLDB functioning.

2/ Datey, C.D., Cost of Agricultural Credit Operations, mimeo, 1976, thefirst draft of a consultant's report prepared for the World Bank.

97


this percentage will grow in the future. Ordinary SLDB debentures are sub-scribed by both institutional and non-institutional sources. State govern-ments, which have legal control over the SLDB, guarantee both types of de-bentures and also subscribe themselves to the 'special development' deben-tures. The remaining 20% of ARDC disbursements are made to CB, but consti-tute a small portion of the funds for agricultural lending raised by thesebanks.

16. In 1975/76 the marginal pre-tax spread for the ARDC was 1.42%while the average spread was less at 1.31%. 1/ No deterioration in the ARDCfinancial position is indicated by these figures. The SLDB appear to be ina slightly different position. The marginal spread on current lending isfigured at 3% to 3.5% with the current cost of funds at 7.5% and lendingrates at 10.5% for minor irrigation and 11% for all other purposes. How-ever, the long term structure of the SLDB and the past use of sinking fundsto generate high income on fixed deposits gives an average spread for theSLDB from 5.5% to 6.0%. 2/ The implications of continued divergence betweenaverage and marginal spreads is an inevitable decline in SLDB profitability.However, such an outcome would be at the discretion of the State Governmentswhich could take up SLDB debentures at rates low enough again to reduce themarginal cost of funds to the SLDB should their financial viability ever bethreatened. 3/

17. The adequacy of the LDB spread also hinges on the magnitude ofappropriate administrative charges to be borne by the lending institution.Datey estimates an 8% interest premium on this account but the derivationof this figure is unclear at best and appears to be quite arbitrary. A 3.5%premium is derived by making certain assumptions about the desirable ratioof supervisors to the volume of new and old loans and about the cost of pro-viding technical services now either paid for by Government or not providedat all. 4/ Datey then adds this to "the effective margin which the SLDB willhave to maintain." This latter he estimates without elaboration at 4.5%.As the 3.5% already includes a significant portion of overhead (0.8%) andall salaries (2.7%) it is unclear what administrative purpose the "effectivemargin" of 4.5% serves. Without further investigation it is difficult to

1/ Datey, C.D. ibid., Table 16. A comprehensive assessment of the ARDCfinancial position made by the appraisal mission indicates somewhatlower spreads--around 1%--which, however, are still acceptable.

2/ Datey, C.D., ibid., p. 52.

3/ This is the approach taken in SFC small-scale industry loans financedby IDA/Bank in which SFC on-lending rates are lower than to medium-scaleindustry while the financial spreads are larger on small-scale lendingdue to concessional GOI terms to SFC's for small-scale lending (throughIDBI).

4/ Datey, C.D., op. cit., Annex VIII, p. 5. 98


assess exactly what spread a full accounting of administrative expenditureswould entail.

18. The Determination of Who Should Bear Administrative Costs. Morefundamentally there may be sound economic reasons for not applying the fulladministrative spread. If there is a divergence between social and privatebenefits to investment in agriculture, due for example to risk aversion onthe part of farmers, then a divergence in social and private costs may bejustified to generate the socially desirable level of investment. Thisdivergence in costs might be accomplished through explicit subsidizationbut more plausibly by the public provision of services, such as extensionand project supervision, that serve to reduce the risks involved. It isby no means clear then that efficiency is served by shifting these costsof agriculture credit onto the borrower.

19. Cost Differentials for Different Classes of Borrowers. Cross-subsidization among lenders occurs whenever a single lending rate is usedto cover the average costs of lending to different classes of borrowers al-though there are identifiable administrative cost differentials associatedwith the different groups. In the case of India, Datey estimates that anextra 1% interest premium is needed to cover the added cost of lending tosmall farmers. This presumably covers both the extra risk premium asso-ciated with the higher probability of overdues and default by small farmersand the added costs of processing the increased number of loans which ahigher proportion of small-farmer lending would generate. However, it isnot clear whether the 1% spread represents the average increase needed orthe marginal increase to be charged solely to small farmers.

20. The same analytical difficulties apply to small farmer cost dif-ferentials as apply to administrative costs in general. To the extent thatprivate and social benefits diverge for reasons peculiar to small farm lend-ing, there is a case for explicit subsidization to equalize lending ratesbetween smail and large farmers. In its policy statement on agriculturalcredit, the Bank advocates a uniform lending rate in order to: avoid theleakages and opportunities for corruption that might stem from differentialrates. In addition uniform interest rates would help foster optimal resourceallocation. 1/

21. Divergent Lending Rates by Different Agricultural Lending Insti-tutions. Another issue arises when different institutions lending in theagricultural sector charge different interest rates on similar term loans.This is the case with CB and LDB in India. CB which receive almost 20% ofARDC disbursements raise the remainder of their funds through deposits on

1/ World Bank, Agricultural Credit, 1975, pp. 49-50.

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which it is estimated that average interest costs equal 7.07%. 1/ This isapproximately the same as the cost of funds from ARDC. Banks currentlycharge 14%-16% for non-ARDC agricultural loans. Data on average -.terestincome from all agricultural loans outstanding is not readily available, butthe average spread for rural commercial banks is unlikely to be less than6%-8% with a marginal spread at the upper end of this range. This appearsto exceed the average LDB spread slightly and is considerably greater thanthe marginal LDB spread. Again it is difficult to assess the adequacy ofthis margin, but one may note that Datey's estimate of the administrativecosts of agricultural lending for CB is 6.0%. 2/ At any rate, comparabilityof the spread between LDB and CB bears less on efficiency issues than on theinequity of divergent lending rates from two institutions in the same sector.Uniformity of rates for similar term lending is a desirable objective.

RECOMMENDATIONS ON PROJECT-RELATED ISSUES

22. Sorting out the uncertainties on project-related issues leads tofew unequivocal recommendations. Without normative judgment on the ratio ofsocial to private benefits from agricultural credit, one cannot determinewhich administrative costs should be passed on to different or all classesof borrowers. Whatever administrative costs are found legitimate should,however, be made explicit and all institutions in the sector should be ex-pected to cover these costs in both the short and long-run. This dictumwould seem to require some widening of the current marginal spread for LDB.On allocative grounds, narrowing of the differential between LDB and CB longterm agricultural lending rates would also be desirable. A slight--say 1%--rise in the LDB lending rate coupled possibly with a decline in the CB rateswould facilitate both these objectives. Possibilities for narrowing theexisting differential could be usefully discussed during negotiations forthe second ARDC project. It is further recommended that under this project,GOI and ARDC complete a study of the adequacy of the present spread in bor-rowing and lending rates in relation to long term objectives for agriculturallending institutions and that based on this study appropriate adjustmentsbe undertaken to achieve these objectives.

1/ This figure is for rural branches only. The average costs for CB opera-tions as a whole may be as low as 5%. Marginal interest costs are inthe range 9%-12% on fixed term deposits.

2/ Datey, Ibid., p. 54. This is probably at the upper end of the range onpurely administrative changes, but it does not include any risk marginor charges. CB may undertake less secure loans than LDB which lend bylaw only against first mortgages on land.

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ANNEX 3Table 1

INDIA


State Cooperative Banks

Summary7 of Overdues- / - 1971/72 to 1975/76

State 1971/72 1972/73 1973/74 1974/75 1975/76-/

Andhra Pradesh 5.0 6.0 1.5 2.0 N.A.

Assam 92.0 93.0 97.1 98.9 94.1

Bihar N.A. 29.0 29.0 37.0 N.A.

Gujarat Nil Nil Nil Nil 4.0

Haryana Nil Nil Nil Nil Nil

Himachal Pradesh 52.0 72.0 67.5 68.0 N.A.

Jammu and Kashmir 10.0 19.0 23.4 23.0 N.A.

Karnataka 2.0 1.0 0.6 1.3 N.A.

Kerala Nil 1.0 0.1 0.05 Nil

Madhya Pradesh 4.0 5.0 4.5 1.0 5.4

Maharashtra 1.0 5.0 9.6 3.0 2.0

Orissa Nil 7.0 3.3 2.6 0.5

Punjab Nil Nil 0.1 N.A. Nil

Rajasthan 32.0 12.0 2.4 1.0 0.3

Tamil Nadu Nil Nil 0.2 0.3 0.6

Uttar Pradesh 5.0 4.0 4.3 3.1 Nil

West Bengal 59.0 35.0 20.7 6.1 5.2

Others 17.4 38.2 45.5 30.0 70.0

1/ Expressed as a percentage of demand (principal and interest falling due during theyear plus overdues from previous years).

2/ Provisional.

101

September 1976

ANNEX 3Table 2

INDIA


State Land Development Banks and Primary Societies

1/Summary of Overdues - 1971/72-1975/76

(v')r LDB 2/ 2

State Primary 71/72 72/73 73/74 74/75_ 75/76/

Andhra Pradesh SLDB 7.5 36.7 14.2 12.3 9.2Primaries 11.2 19.6 23.3 23.3 14.7

Assam SLDB 60.0 71.4 62.3 74.4 43.5Primaries 66.7 76.3 72.0 72.0 40.2

Bihar S',DB 39.1 42.2 41.6 41.6 27.4

Gujarat SLDB 25.4 57.1 47.5 74.2 56.3

Haryana SLDB Nil Nil Nil Nil NilPrimaries 0.4 1.1 0.6 2.4 3.0

Himachal Pradesh SLDB 68.0 71.1 56.1 58.5 59.3

Jammu & Kashmir SLDB 27.3 27.6 35.8 36.3 40.9

Karnataka SLDB 27.7 25.6 22.7 30.3 30.0Primaries 43.0 42.0 39.3 42.1 41.9

Kerala SLDB 26.6 27.5 39.2 35.7 9.5Primaries 33.3 34.4 45.8 32.0 20.7

Madhya Pradesh SLDB 37.2 20.6 39.5 32.3 22.5Primaries 48.7 38.3 50.1 50.3 35.5

Maharashtra SLDB 32.1 83.3 44.5 56.2 59.4Primaries 39.2 - 3/ - 3/ - 3/ - 3/

Orissa SLDB 24.1 42.2 50.8 58.5 N/APrimaries 54.7 48.9 54.2 62.6 30.8

Punjab SLDB Nil N/A 7.2 1.9 2.7Primaries 2.7 10.8 11.5 14.0 15.2

Rajasthan SLDB 32.4 47.9 50.6 47.4 20.4Primaries 47.4 47.9 48.7 40.0 25.8

Tamil Nadu SLDB 2.2 5.7 5.1 12.9 17.7Primaries 18.8 19.1 20.0 40.7 36.4

Uttar Pradesh SLDB 12.7 25.7 21.0 23.9 17.0

West Bengal SLDB 32.8 28.8 24.9 24.9 NilPrimaries 64.0 N/A 43.8 31.3 13.5

1/ Expressed as a percentage of demand (princiDal and interest falling due duringthe vear plus overdues from previous years).

2/ Provisional

3/ Since converted into unitary structure

Source: Statistical statements relating to the Cooperative Movement in India (RBI)

September 22, 1976 102

ANNEX 4Page 1

INDIA



Background

1. The Agricultural Refinance Corporation (ARC) was set up by an Actof Parliament and began operations on July 1, 1963 after comprehensive studiesrevealed that institutional credit, particularly for term financing of invest-ment in agriculture, was inadequate. Subsequent amendments in the Act madeseveral significant changes and included changing the name of the Corporationto the Agricultural Refinance and Development Corporation (ARDC). The Actprovides for the scope of ARDC activities, the principles guiding its activ-ities, and organizational matters.

Functions

2. The ARDC has engaged itself in the task of enlarging term creditavailable for agricultural investments, improving lending quality at alllevels, rationalizing lending policies and procedures in order to gear upfor production-oriented lending, removing of disparities between differentregions in the country in regard to long-term agricultural investments, andpromoting small farmer interests and other under-privileged sections of therural society. The ARDC not only serves as a refinancing agency providinglong-term accommodation to agricultural credit projects, but also stimulatesinterest of State government authorities and credit agencies in agriculturaldevelopment schemes by helping to formulate and implement schemes.

3. MIainly, ARDC can refinance: (a) planned schemes of minor irrigationworks covering compact areas; (b) reclamation and preparation of land forirrigation under command of surface irrigation projects; (c) forestry develop-ment; (d) soil conservation and mechanization of farming; (e) production ofplantation crops; (f) construction of warehouses; and (g) diversified agri-cultural schemes.

4. Purpose-wise, refinancing for minor irrigation schemes accountsfor the major portion of its business. Up to June 30, 1976, this accountedfor 75.2% followed by farm mechanization (10.8%), land development, reclama-tion, and soil conservation (5.8%), with the balance divided among plantationand horticulture, diversified agriculture, storage and market yard schemes.

103

ANNEX 4Page 2

Share Capital and Resources

5. Recent amendments in the Act, (proposed under ARDC I), increasedauthorized share capital from Rs 250 M to Rs 1,000 M. Share cap!tal cannow be increased by RBI with previous approval of GOI. At the close of thefiscal year June 30, 1976, share capital issued and outstanding stood atRs 250 M. Current share holdings are: (a) RBI 14,126 (56.5%); (b) SLDBand SCB 6,428 (25.7%); scheduled commercial banks 4,131 (16.5%) and others315 (1.3%). The initial share capital of Rs 50 M carried a GOI guaranteedannual dividend of 4.25%. There is also Rs 100 M share capital with adividend rate of 4.5%, Rs 50 M at 6.0% and Rs 50 M at 6.25%.

6. The ARDC can raise funds from the following sources: (a) borrow-ings from GOI and from any entity approved by GOI; (b) issue and sale ofdebentures and bonds guaranteed by GOI; (c) borrowings frum RBI; and(d) deposits from GOI, State governments and local authorities. Maximumborrowing is limited to 20 times its paid up capital and reserves. TheARDC Act provides that RBI may deposit with ARDC for 15 years, interestfree, dividends accruing on its shares, which further increases resourcesavailable to ARDC.

7. As of June 30, 1976, ARDC had total borrowings of about Rs 5,260 M.Interest rates ranged from 4.25% to 7% per annum and repayments up to 15years. The ARDC average borrowings and lending rates for the years 1963-64to 1975-76 are shown in Table 1 and an analysis of the ARDC interest ratestructure is in Table 2.

8. The ARDC Board of Directors is comprised of nine members: theChairman, who is a Deputy Governor of RBI and nominated by it; one othernominated by RBI; three nominated by GOI; one elected by SLDB shareholders;one elected by SCB shareholders; one elected by the Life Insurance Corpora-tion and scheduled banks that are shareholders; and a managing directorappointed by RBI after consultation with the Board. The present BoardMembers are listed in Table 3.

Management

9. The managing director is Chief Executive Officer and is responsiblefor the day to day operations of ARDC. He is assisted by a deputy managingdirector, who was recently appointed, and three senior directors. The Boardof Directors has authorized the managing director to approve refinance forschemes up to a limit of Rs 5 million per scheme. This power is exercisedby the managing director with the help of a management committee consistingof himself and three senior directors.

Staff

10. Most of the professional staff members have been seconded from RBI.Such an arrangement has disadvantages since it provides for no certain con-tinuity of staff as staff members can be transferred back to RBI at any time.

104

ANNEX 4Page 3

However, this has not created any significant problems since such transfershave not been frequent. This close relationship with RBI also has certainadvantages. Recruitment is no problem, staff are transferred from RBIwhen required and no staff member is transferred until he has receivedbanking training through an RBI training school.

11. The ARDC had a professional staff of about 320 as of June 30, 1976,of which about 200 were located in the head office in Bombay. The ARDC hasestablished technical units at the head office, Calcutta, and Lucknow. Theseunits have specialists in groundwater and hydrology, soil conservation andwater management, animal husbandry, fisheries, and plantation production.They not only provide technical advice to ARDC but also to lending institu-tions. They also assist States in identifying viable projects and help lend-ing institutions and State governments in project formulation and implementa-tion. The ARDC recognizes the need to upgrade and increase its staff at alllevels. Staff projection estimates through 1980 are shown in Table 4.

Organization

12. Overall organization of ARDC is shown in Table 5. Recently, a dep-uty managing director was appointed but his specific duties have not yet beenidentified. The head office is in Bombay and there are 15 regional officescovering all the States. The new organizational structure consists of eightDepartments: Projects Division I, Projects Division II, Projects Division III,Management, Planning and Development, Technical, Evaluation and Programmingand Training.

13. Projects Divisions are headed by senior directors with Statesoperations divided among them. Subdivisions within each Project Divisionare headed by directors. The number of States each director is responsiblefor is kept small to enable concentration upon schemes within the State.Projects Divisions receive proposed schemes, scrutinize them, arrange fortechnical and financial studies wherever necessary, prepare a memorandum tothe Board or a note to the managing director for sanction of the scheme,issue sanction letters and subsequently arrange for disbursement of funds.They also scrutinize follow up reports on schemes conducted by regionaloffices and communicate findings to State governments and financing institi-tutions for appropriate remedial action.

14. There are three sections, Finance, Administration, and Board Matters,in the Management Division and each section is headed by a director.

15. Finance section take care of resources budgets, and maintains ARDCaccounts. This section supervises ARDC fund positions and mobilizes resourcesfor lending programs. In this regard, the section arranges periodic marketborrowings through sale of bonds, and arranges to borrow funds from GOI in-cluding reimbursement under IDA credits. In addition, the section arrangesfor resources from the National Agricultural Credit Fund set up in RBI, as wellas for short-term borrowings from RBI. Excess funds not immediately requiredare invested in Government securities. The section is also responsible forpreparation of ARDC financial reports. 105

ANNEX 4Page 4

16. The Administration section is responsible for all administrativematters and staffing at both the head office and regional offices.

17. Board Matters, such as circulating agenda papers for board meetingsand preparation of minutes of meetings are handled by this separate section.

18. A director is in charge of the Planning and Development Department,which is directly supervised by the managing director. The department pro-vides management information on: systems; performance budgeting; monthlyprogress reports: annual reports; IDA matters other than accounts, andreplies to Parlinmentary questions. It is also responsible for programplanning, method2 of appraisal, surveys and studies.

19. The Te-rinical Division has experts in groundwater and hydrology,soil conservation, and water management, animal husbandry, and fisheries.This division re;liews technical aspects of schemes and makes recommendationsas deemed advisable.

20. The Evaluation and Programming section is concerned with the method-ology for financial appraisal of schemes. Evaluation responsibilities aredirected toward monitoring ongoing projects including IDA schemes. Speci-fic objectives are to: assess scheme benefits at farm level; assess difficul-ties faced in obtaining full benefits; identify types of farmers who are bene-ficiaries of ARDC refinanced schemes, and find out possible defects in schemeformulation, appraisal and execution. The section has also been guiding re-gional offices in translating small farmer income limits into acreage limitsfor different agro-climatic conditions in each State in accordance with theSmall Farmer definition (Schedule D).

21. The Training Division mainly organizes and coordinates trainingprograms with special emphasis on training of LDB staff.

22. Regional offices assist SLDB, CB and State governments in formulatingagricultural development projects, clarifying ARDC policies and procedures,undertaking pre-appraisals of projects, and in supervising general executionof ARDC-financed projects.

Lending Policies

23. The ARDC provides financing to SLDB, SCB, CB and such other insti-tutions as may be approved by GOI upon the recommendation of RBI.

24. Financial assistance by ARDC is available for approved schemes andcovers diverse activities for promoting agricultural development. Schemes,which should be aimed at increasing agricultural production and should bedrawn up on an area development basis can involve just one farmer, a groupor an association of farmers. Preference is given to schemes involving alarge number of farmers.

106

ANNEX 4Page 5

25. Schemes must be technically feasible and financially viable. Theyshould include provision for credit, technical services, working capital orseasonal credit and marketing. The ARDC technical staff reviews and evaluateseach scheme. Consideration is given to financial evaluations including costestimates, suitability of cropping patterns, inputs, repayment capacity,seasonal credit arrangements and marketing.

Lending Terms

26. The ARDC provides refinancing for both medium-term loans (three tofive years) and long-term loans (up to 15 years) for approved schemes. Thisis in line with the identified need for more term credit for investment inagriculture. Refinance is provided by subscriptions to special debenturesissued by the SLDB or by loans to SCB and CB.

27. Normally, ARDC subscribes up to 75% of debentures leaving theremaining 25% to be met by respective State governments. Beginning in 1967/68, ARDC provided refinancing up to 90% in the case of minor irrigation asan incentive to various State governments and to relieve their financialburden. This concession has been extended to the end of the Fifth Year plan(June 30, 1979).

28. Other schemes, land leveling, farm mechanization, etc., are re-financed at the rate of about 75% by ARDC, except for financial institutionsoperating in lesser developed eastern and in the north eastern regions. Inthese regions, ARDC is providing 90% refinancing uniformly irrespective ofthe purpose. This concession has been made to encourage financing institu-tions in those regions to enlarge their term lending to agriculture.

29. The ARDC modified its policy from April 1, 1976, in regard to

providing refinancing to financing institutions for schemes under the aegisof SFDA/MFAL agencies. From that date, refinancing has been provided up to90% with the remaining 10% by concerned State governments in respect toschemes of SLDB, and by CB from their own resources. Prior to that date,ARDC had been refinancing 100% of loans to such small farmers.

30. Prior to IDA participation in ARDC operations, special debentureswere repayable in one lump sum at the end of the loan period and ARDC re-quired that collections from farmers in the interim be placed in a sinkingfund. In the case of IDA-supported projects, ARDC is given the benefit ofthe re-use of funds realized from farmers' collections. Repayments of suchspecial debentures under IDA projects are, therefore, scheduled approximatelyto match farmers' collections, and sinking fund arrangements do not apply.

31. Farmers are expected to obtain seasonal credit (less than one year)from SCB, CB, or other sources. Although the recent amendment to the ARDCAct enables ARDC to grant credit for working capital or seasonal requirements,such credit would be confined to integrated schemes. Split lines of creditare not desirable from either the lenders or borrowers point of view. Long-term lenders may be placed in precarious positions in times of adversity even

107

ANNEX 4Page 6

though they may be adequately secured. It is more difficult to work with theborrower in arranging revised or rescheduled loan repayments when this becomesnecessary if more than one lender is involved. The Committee, which was ap-pointed in accordance with the terms of ARDC I, to look into the possibilityof a merger of the two cooperative credit structures has strongly recommendedsuch a merger. The GOI is expected to make a decision on the Committee'srecommendations during the next fewr months.

32. Currently, ARDC is lending at 7.5% on minor irrigation schemes and8.0% on other schemes. On-lending institutions charge farmers a minimum of10.5% and 11.0%, respectively. All lending institutions operating a parti-cular scheme must charge the same rate of interest. This spread to participa-ting banks is barely adequate, particularly if LDBs are to be strengthenedby recruiting staff on direct establishment (Annex 3), and RBI and ARDC shouldreview their lending terms with a view to increasing the spread. An increasein lending rates of about 1% to 2% to farmers would bring agricultural finan-cing through ARDC more in line with comparable loans not refinanced by ARDC.

Lending Commitments

33. The following table shows the growth of ARDC commitments lesssubsequent cancellations from 1963/'64 through 1975/76:

No. of Disbursementschemes ARDC Commitment as as percentagesanctioned phased Disbursement of commitmentat the end During Upto the During Upto the During Upto the

Year of the the end of the end of the end of(July-June) year year the year year the year year the year

…(Rs M)…--------------- ------ %-------

1963-64 3 - - - - - -

1964-65 13 44.7 44.7 4.5 4.5 10.1 10.11965-66 36 82.8 87.3 44.5 49.0 53.7 56.11966-67 42 94.0 143.0 20.8 69.8 22.1 48.81967-68 128 185.0 254.8 56.7 126.5 30.6 49.61968-69 233 459.4 585.9 178.4 304.9 38.8 52.01969-70 371 616.6 921.5 286.0 590.9 46.4 64.11970-71 458 665.8 ]L,256.7 306.2 897.1 46.0 71.41971-72 711 863.3 1,760.4 349.8 1,246.9 40.5 70.81972-73 923 1,667.1 2,914.0 941.4 2,188.3 56.5 75.11973-74 1,457 1,882.0 4,355.6 978.4 3,166.7 52.0 72.71974-75 2,053 1,875.4 6,087.3 1,064.0 4,230.7 56.8 69.51975-76 2,905 2,965.2 8,477.8 1,711.5 5,942.0 57.7 70.1

As of September 30, 1976, ARDC had 1,063 schemes under consideration for atotal of Rs 5,357.7 (Table 6).

34. During the initial years, ARDC transacted very little business dueto the need to establish the groundwork and bases for its operation, and for

108

ANNEX 4Page 7

building its staff. The above Table shows the significant growth that hastaken place in recent years. Most of the earlier schemes sanctioned werefinanced by LDB. However, during the last two years, CBs have become moresignificant in the field of agricultural financing and use of ARDC facilities.

ARDC Schemes Sanctioned During 1975/76

ARDC CommitmentsSchemes Approved Total AverageNumber % per scheme

Rs M % Rs M

(a) Land DevelopmentBanks 256 28.1 1,766 59.5 6.90

(b) Scheduled Com-mercial Banks 650 71.5 1,195 40.2 1.83

(c) State Com-mercial Banks 3 .4 8 0.3 2.66

Total 909 100.0 2,969 100.0 3.26

Purposewise Distribution of ARDC Schemes Sanctioned Up to June 30, 1976

ARDC CommitmentsAverage

Schemes Approved Total per schemePurpose Number _ Rs M % Rs M

(a) Minor Irrigation 1,537 52.9 8,188 71.4 5.3(b) Land Development

and Soil Conser-vation 106 3.7 792 6.9 7.5

(c) Farm Mechanization 489 16.8 1,287 11.2 2.6(d) Plantation, Horti-

culture, Forestry 296 10.2 478 4.2 1.6(e) Poultry and Sheep

Breeding 74 2.6 35 .3 .5(f) Fisheries 121 4.2 158 1.4 1.3(g) Dairy 195 6.7 246 2.1 1.3(h) Storage and Market

Yards 85 2.9 287 2.5 3.4(i) Agricultural

Aviation 2 -- 2 -- --

Total 2,905 100.0 11,473 100.0 4.0

Disbursements

36. During the early years, ARDC disbursements lagged behind estimatesbut as the Table in para 33 shows, this has improved in recent years, partly

109

ANNEX 4

Page 8

as a result of better administrative arrangements and partly through ARDC'smore frequent recourse to imposing commitment fees. As of June 30, 1976,disbursements were 70.1% of scheduled commitments (para 33). Purpose-wisedisbursements by ARDC since inception are shown in Table 7.

Source of Funds

37. (a) Share Capital: The borrowing power of ARDC is restricted to20 times paid-up capital and reserve funds. As of June 30, 1976, its issuedand paid-up capital was Rs 250 M and shareholders were as follows:

Institution Shares Held June 30, 1976Rs M %

Reserve Bank of India 141.3 56.5Central Land Development Banks 43.7 17.5State Cooperative Banks 20.6 8.2Scheduled Commercial Banks 41.3 16.5Life Insurance Corporation of India 2.9 1.2Other Insurance and

Investments Companies 0.2 0.1250.0 100.0

The ARDC projects that paid-up share capital will increaseto Rs 350 M by June 30, 1977, and then increase eachof the next four years reaching Rs 650 M by June 30, 1981.

(b) Borrowings from GOI: Borrowings from GOI, which are atpresent limited to rupee equivalent of disbursements madeunder IDA credits, stood at Rs 2,500 M at June 30, 1976.

(c) Issue and Sale of Debentures and Bonds Guaranteed by GOI:The ARDC has resorted to sizeable market borrowings inrecent years to mobilize local resources and to helpfinance its growing business. The growth of localresources mobilization is shown in Table 8. During1975/76, ARDC issued the IX and X series of bonds for anaggregate sum of Rs 385 M. These issues which mature inten years carry an interest rate of 6% per annum. At June30, 1976, ARDC total market borrowings were Rs 1,377 M.The following Table shows the amounts outstanding as well asthe subscribers for bond issues:

110

ANNEX 4Page 9

Bond SeriesSubscribers I - VIII IX X Total

------------- (Rs M)---------------State Bank of India

and Subsidiaries 227.5 15.4 48.6 291.5Nationalized banks 444.6 42.5 78.5 565.6Other Commercial Banks 61.3 10.6 15.4 87.3Life Insurance Corpora-

tion of India 9.5 1.0 2.5 13.0Other Insurance and

Investment Companies 2.1 2.5 5.0 9.6Cooperative Banks 239.1 38.0 125.0 402.1Other 8.0 - - 8.0

Total 992.1 110.0 275.0 1,377.1

(d) Borrowings from RBI for Periods Not Exceeding 15 Years:During 1976/77, RBI initially approved a limit of Rs 400 Munder the National Agricultural Credit (Long-term Operations)Fund and this limit was fully utilized. In June 1976, whenthere was a considerable step-up of ARDC disbursements, RBIgranted a supplemental limit of Rs 200 M which was fullyutilized. Repayments on earlier loans were Rs 98 M.

(e) Borrowings from RBI for Short-term Loans: The ARDC has alimit of Rs 150 M for short-term loans from RBI and atJune 30, 1976, the outstanding balance was Rs 17 M.

(f) Repayments by the Member Banks: During 1975-76, repay-ments by member banks amounted to Rs 245.9 M. Thefollowing Table shows the breakdown by agencies foraggregate repayment of Rs 448 M as of June 30, 1976:

RepaymentsIDA Assisted

Agency ARDC Schemes Total-----------------(Rs M)--------------

Scheduled Commercial Banks 135.2 26.6 161.8State Land Development Banks 75.6 162.5 238.1State Cooperative Banks 48.1 - 48.1

Total 258.9 189.1 448.0

Operating Results

38. A comparative statement of ARDC operating results for the yearsJune 30, 1972 through June 30, 1976, is given in Table 9 and is summarizedbelow:

111

ANNEX 4Page 10

Operating Results

Profit Trf. to ProfitGross Total Before Special After Net

Year Income Expenses Taxes Reserve Tax Tax Dividend Surplus1971-72 60.6 49.7 10.9 1.1 5.8 4.0 3.0 1.01972-73 92.4 75.4 17.0 1.7 8.9 6.4 4.4 2.01973-74 155.3 124.4 30.9 3.1 16.0 11.8 6.7 5.11974-75 221.4 177.3 44.1 4.5 23.0 16.6 8.9 7.71975-76 299.1 240.6 58.5 5.9 30.9 21.7 10.9 10.8

39. Operations have improved during each of the past five years asvolume of lending has increased. Profit level has increased satisfactorilyand is expected to remain good in the years ahead. The ARDC does not setaside any reserve for losses on bad debts, and management is of the opinionthat is not necessary in view of the type of lending activities, the typeof security behind the loans, guarantees of State governments, and agree-ments with RBI and CB which permit ARDC to draw against their deposits withRBI should a CB not repay ARDC as scheduled. The ARDC has no overdues, never-theless, it would be prudent to keep the question of creating a reserve forbad and doubtful debts under constant review.

Financial Position

40. The ARDC is in a sound financial position. Its equity positionas of June 30, 1976, was unimpaired and its securities are mainly in deben-tures of LDB which are guaranteed by State governments. Comparative balancesheets for the past five years and projected balance sheets for 1976/77through 1980/81 are shown in Table 10. The June 30, 1976 balance sheet issummarized below:

Liabilities Assets(Rs M) (Rs M)

Paid-up share capital 250.0 Cash on hand 4.0Reserve and surplus 44.0 IDA loans 535.0Bonds and debentures 1,377.0 IDA debentures 2,483.0Deposits 23.0 Other Loans 701.0Loans from GOI 2,501.0 Other debentures 1,775.0Loans from RBI 1,401.0 Interest accrued on

loans and debentures 191.0Other Liabilities 103.0 Other assets 10.0

Total 5,699.0 5,699.0

112

ANNEX 4Page 11

Audit

41. In accordance with its Act, ARDC accounts are audited annually byaccountants duly qualified under the All-India Companies Act of 1956. Underthe same Act, GOI can appoint the Comptroller and Auditor General of Indiato examine and report on the accounts of ARDC. To date, GOI has not foundthe need to exercise this power. The present auditors are Batlboi andPurohit, Chartered Accountants.

March 1977

113

INDIA


Agricultural Refinance and Development Cartoration

Average Borrowing and Lending R_ate from 1963-64 to 1975-76

Unit 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76

I. Borrowings ouitstanding as at June 30 Rs M Nil Nil Nil Nil 30.0 207.5 506.9 887.3 1,082.3 1,967.6 2,903.2 3,83;.3 5,229.0

(excluding share capital and interestfree borrowing of Rs 50 M)

II. Interest paid on borrowings during Rs M Nil Nil Nil Nil .47 4.42 17.07 30.60 44.12 89.37 113.4 162.2 220.6

the year

III. Average rate of borrowings 7. Nil Nil Nil Nil 1.55 2.13 3.37 3.47 4,07 4.10 3.90 4.22 4.21

(percentage II to I)

IV. Refinance ouitstanding as at Rs M Nil 4.5 49.0 69.8 126.3 304.0 589.0 889.3 1,234.1 2,359.0 3,097.5 4,061.8 5,493.9

June 30

V. Interest recovery on refinance Rs M Nil Nil 1.09 3.06 4.83 10.20 24.09 40.12 58.78 117.27 149.9 211.5 287.3

during the year

VI. Average rate of lending % Nil 0.05 2.22 4.40 3.83 3.36 4.09 4.51 4.76 4.97 4.83 5.20 5.22

(percentage of V to VI)

VII. Margin (VI - III) % Nil 0.05 2.22 4.40 2.28 1.23 0.72 1.04 0.69 0.87 0.93 0.98 1.01

March 21, 1977

V

H~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~61

INDIA

RECORD ACRICULTUTRAL REFINANCE ANR) DEVELOFMENT CORPORATION CREDIT PROJECT

Agticult-rl Refinance and Develo-=ent Corporation

Analyss of Interest Rote Strutur(Ae.o.nt. In R. M)

(Rtee it T, per ye-r)

1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74

A=t. Rate Ant, Rote A.t RRt n ate A=tt Ant. Rate Aert. Rote t. Rate Ant. Rete Ant. Rntc Ant. Rote At. Rate A=t. Rate At. -Rt

1. Lendlee Rate* - 5.5 4.5 6.00 44.5 6.00 20.8 6.00 56.7 6.00 178.4 6.00 285.9 6.00 306.1 6.50 349.8 6.00 951.3 7.00 978.4 7.00 1,064.0 7.5 1,711.5 7.S

88

Total - - 4.5 - 44.5 - 20.8 - 56.7 - 179.4 - 285.9 - 306.1 - 349.8 - 951.3 _ 978.4 - 1,064.0 8 1,711.5 -

II Boerotina Rota

(G) 0O1 Loans

(1) Noenal 50,0 30.0 5.50 117.5 4.75 150.0 4.75 120.0 4.75 0.5 4.75 70.0 5.25 - - - - - -

69.0 5.25 40,0 5.25 1OR.O 5.75 70.0 5.25

(1i) IDA _ _ _ _ _ _ 31.1 4.75 335.9 4.75 124.0 4.75 98.7 4.75 204.0 4.75

2.2 5.25 71.3 5.25 199.9 5.25 159.5 5.25 158.9 5.2559.0 5.50 24.7 .595 29.4 5.5026.6 5.75 37.0 5.75 50.9 5.75

11.2 6.0 19.4 6.087.6 6.50

(b) Op.. H-k.L B-ing. 2:5 7 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~25 .

(4) Opec Markat Rorroowtega- _-_ _ _ _ _ _ _ _ _ _ 109.4 5.75 85.3 5.75 82.5 5.75 100.5 5.75 275.0 5.75 330.0 6.0 385.0 6.0

(c) BorroYnRfro= RenB9I

(1) Sho-t-ter-- - - 75.2 6.00 33.9 6.00 37.0 6.00 116.0 6.00 45.0 9.0 17.0 9.0

(it) L.ng-trr-50.0 4.25 25.00 4.25 229.5 4.75 190.9 4.75 600.0 6.0

50.R 4.75 390.90 6.800

(d) Shar- Capital 50.0 4.25 -- -- - - - -50.0 4.50 50.0 4.50 50.0 6.00 50.0 6.25

Total 100.0… 30.0 - 177.5 - 299.4 - 380.5 - 320.2 - 964.7 - 1,007.1 - 1,156.1 - 1.586.7 -

Rate of lending aR at tha end of the ye.

III. Itere-t-i.oe .ot.taadimg of ARDC NorrewiniR ab on 30-6-1976

intereat free 4.25. 4.75% 5.257 5.50% 5.75% 6%M 6.507. 7% Tota1

(a) -orreotnee 0 roe GOorvraent of India:

(i) Nornal 50.0 - 376.4 340.0 30.0 - - - - 796.4

(0i) IDA/IBRD - - 923.4 500.8 54.1 114.4 21.7 87.6 2.5 1,704,5

(b) Re.erre Barsk Of adie L.T.O. FPnd _ 205.0 309.0 - - - 670.0 - - 1,384.0

(o)pe -kt - - - - - 662.1 715.0 - - 1,377.1

T08al 50.0 205.0 1,608.8 840.8 84.1 776.5 1,606.7 87.6 2.5 5,262.0

00. Ivtere6t-wise toutetandtno of ARDC9 *endinga ason 030-6-1976

5, 5.50% 5.75% 6% 6.507 7% 7.50% 0% Total

(o) Refinance Lo.n- 9.7 - 36.6 526.0 205.0 184.6 273.7 1,235.6

(b) DeobentareR

(i) Norml 72.9 - 739.5 744.1 175.9 114.6 28.8 1,875.8

(ii) IDA - - 342.3 2.3 1,428.5 192.8 392.5 25.4 2,383.8

TotAl 9.7 72.9 342.3 778.4 2,698.6 573.7 691.7 327.9 5,495.2

Septeaber 30, 1976

INDIA



Board of Directors

Nominated/ Date Nominated/ Date Nomination/Name Appointment Elected Elected Election Expires

1. Dr. R. K. Hazari Deputy Govenor -(Chairman) Reserve Bank of India Nominated March 16, 1973 -

2. Shri K. S. Narang Secretary to GOI - Ministryof Agriculture and Irrigation,Department of Agriculture Nominated February 6, 1976 -

3. Shri I. J. Naidu Secretary to GOI - Ministryof Agriculture and Irrigation,-Department of Rural Development Nominated February 6, 1976 -

4. Shri K. P. A. Menon Additional Secretary to GOI -Department of Revenue and Banking Nominated December 5, 1975 -

5. Shri B. S. Vishwanathan President - Karnataka StateCooperative Land Development Bank Elected September 24, 1976 September 24, 1980

6. Shri Veershetty Director - Karnataka StateKushnoor Cooperative Apex Bank, Ltd. Elected September 24, 1976 September 24, 1980

7. Shri P. C. D. Nambiar Managing Director - StateBank of India Elected September 24, 1976 September 24, 1980

8. Dr. A. K. Banerji Executive Director - AgriculturalCredit Department, Reserve Bankof India Nominated November 4, 1976

9. Shri M. A. Chidambaram. Managing Director - AgriculturalRefinance and DevelopmentCorporation Appointed January 12, 1973 - z

1/ (i) A nominated Director shall hold office during the pleasure of the authority nominating him. X(ii) An elected Director shall hold office for four years. w X

November 30, 1976

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INDIA



Organization Chart

HEAD OFFICE

t~~~~~~~~~~~~~~~~~~~~~~~CA RMAN II

DIRECTOR DIECTOR IECO

[ PROJECTS l l PROJECTS l | PROJECTS MANAGEMENT PLANNING AND EVALUATIONPROJECTS PFiOJFCT PROJECTS AN..IEMENT ~~~~~~~~DEVELOPMNTPRGAMNDIVISION I DIVISION 11 DIVISION III DIVISION DIVISION DIVISIN C

RAJASTHAN PLANNING &

DIRECTOR UTTAR DIRECTOR---MA--ARA--TRA FUNDS & DEVELOPMENT MINORPRADESH ~~~~~MADHYA ODA ACCOUNTS & AAEET IRRIGATION DIETR EAUION DIETR TRAINING

DIRECTOR PRADESH I

ORISSA PRADESE~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~OLCOSRDIRECTOR -- U-ARA- DIRECTOR TAMIL NADU DIRECTOR COMMITTEE & IAMTES DIRECTOR VATERN MAAG DIRECTOR RGAMN

RIRAR PONDA MERRY AEMT

PUNJAR KANTK

'A~~~~ AMIIKASHMIR .I

SREGIONAL OFFICES

N. E| STATES4 CENTRES

|COINSULTANCY UNITS

LUCKNOW CALCUTTA

SIKEIM ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.1 -- 66

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPCRATION CREDIT PROJECT


Schemes Under Consideration as at September 30. 1976(Rs M)

Minor Land Development Farm Plantations

Irrigation Soil Conservation Mechanization Horticulture Storage Miscellaneous Total

No. of Mo. of No. of No. of No. of No. of No. ofState Schemes Amount Schemes Amount Schemes Amount Schemes Amount Schemes Amount Schemes Amount Schemes Amount Average Value

1. Andhra Pradesh 18 21.6 3 90.5 7 20.4 6 12.1 - - 55 135.4 89 280.0 3.1

2. Assam 9 21.7 - - - - 4 23.3 4 5.1 3 0.9 20 51.0 2.6

3. Bihar 19 100.8 - - 4 22.0 2 5.5 5 18.3 3 259.3 33 405.9 12.3

4. Delhi 1 0.5 - - - - - - - - - 1 0.5 0.5

5. Goa - - - - - - 2 1.6 - - 4 20.8 6 22.4 3.7

6. Gujarat 46 408.6 3 51.4 3 34.3 - - 4 2.0 8 10.0 64 506.3 7.9

7. Haryana 10 23.6 4 63.2 4 13.8 - - - - 6 5.2 24 105.8 4.4

8. Himachal Pradesh 5 8.6 - - - - 1 8.1 - 1 0.4 7 17.1 2.4

9. Jamsu and Kashmir - - 1 3.3 - - - - - - 2 1.0 3 4.3 1.4

10. Karnataka 23 48.2 5 12.2 22 23.9 27 143.9 6 6.9 18 17.4 101 252.5 2.5

11. Kerala 7 25.2 2 7.3 10 24.8 23 63.8 - - 12 12.9 54 134.0 2.5

12. Madhya Pradesh 53 285.1 2 12.1 8 43.4 3 4.1 4 6.5 18 15.7 88 366.9 4.2

13. Maharashtra 76 142.5 2 4.3 12 243.9 8 9.4 2 6.9 35 525.2 135 932.2 6.9

14. Manipur 1 0.3 - - - - - - - - - - 1 0.3 0.3

15. Meghalaya - - - - - - 2 0.7 - - 1 0.1 3 0.8 0.3

16. Nagaland - - - - 1 7.9 - - - - - - 1 7.9 7.9

17. Orissa 55 612.0 3 16.9 3 9.1 4 7.1 2 2.9 6 10.5 73 658.5 9.0

18. Punjab 11 65.5 12 250.2 3 16.5 - - - - 9 17.1 35 349.3 10.0

19. Rajasthan 34 198.1 11 84.0 2 32.2 1 9.5 6 16.8 4 7.4 58 348.0 6.0

20. Tamil Nadu 9 70.4 3 6.9 5 511 22 81.6 2 1.8 12 10.0 53 175.8 3.3

21. Uttar Pradesh 11 31.5 66 134.8 25 55.6 2 6.1 8 17.5 35 215.6 147 461.1 3.1

22. West Bengal 46 246.2 - - 1 0.1 11 10.1 1 1.6 8 19.1 67 277.1 4.1

H Total 434 2,310.4 117 737.1 110 553.0 118 386.9 44 86.3 240 1,284.0 1.063 5,357.7 5.0

December 16, 1976

ANNEX 4Table 7

INDIA


Agricultural Refinance and Development CorporationPurposewise Disbursements Since Inception

(Rs M)

Up to During Up to6/30 1969- 1970- 1971- 1972- 1973- 1974- 1975- 6/30

Purpose 1969 1970 1971 1972 1973 1974 1979 1976 1976

Minor Irrigation 128.1 223.3 230.6 267.4 841.8 853.0 837.8 1,081.8 4,460.2

Land Development/Reclamation/Soil Conservation 138.8 33.2 43.7 23.7 23.0 17.8 20.1 49.2 349.5

Farm Mechanization 1.4 1.6 1.1 3.6 21.8 37.5 122.3 457.5 650.4

Plantation/Horticulture 20.7 15.0 19.9 20.5 14.9 21.9 20.0 30.7 163.6

Poultry/Sheep Breeding .1 .6 - - 1.5 .9 6.5 6.8 16.4

Fisheries 5.6 3.6 3.7 5.9 1.2 8.6 17.8 24.3 70.7

Dairy Development - - - 3.9 2.6 8.2 15.8 28.8 59.3

Storage & Market Yards 10.0 8.7 7.2 24.8 34.6 29.3 23.7 31.9 170.2

Agricultural Aviation - - - - - 1.2 - .5 1.7

Total 304.7 286.0 306.2 349.8 941.4 978.4 1,064.0 1,711.5 5,942.0

120

INDIA


Local Resources Mobilization(Rs M)

- Actual ----------- --------- Projected --------1973-74 1974-75 1975-76 1976-77 1977-78 1978-79

Source

RBI/Bonds 586 734 990 985 1,313 1,409

Repayments 42 93 246 310 470 600

Share capital, etc. 9 62 67 128 86 97

Total Local Resources 637 889 1,303 1,423 1,869 2,106

Add IDA Funds 386 331 534 935 1,067 1,187

Total Resources 1,023 1,220 1,837 2,358 2,936 3,293

Local Resources as a% of Total Resources 62 73 71 60 64 64

March 22, 1977

00 3lF

INDIA



Condensed Statement of Income and Expenditure 1971/72-1980/81(RB M)

--------------------- Actual ---------------------- ----- Estimated ------------------1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81

INCOME

Interest Earned on:(i) IDA Loans/Debentures 1.0 12.0 50.9 79.4 133.2 234.0 360.5 506.1 669.8 852.3

(ii) Other Loans/Debentures 57.8 76.6 99.0 132.1 154.0 191.3 219.0 249.2 283.8 322.0Other Income 1.8 3.8 5.4 9,9 11.9 15.0 18.7 23.4 29.3 36.6

Total Income -70*7 155.3 221.4 2 99T 449.2 778,7 982.9 1,210.9

EXPENSES

Interest Paid on:(i) GOI/IDA Loans 31.2 43.7 66.3 85.1 107.6 162.6 232.8 309.7 395.2 488.7

(ii) RBI Loans 0.5 6.1 15.7 30.1 64.4 75.0 105.5 1 3 7 ,. 168.7 203.4

(iii) bonds and Decentures 12.4 17.7 31.4 47.0 12.6 84.o 107.2 139.7 172.6 202.5

Salaries and Staff Benefits 3.9 4.9 7.1 10.1 12. 17.0 22.2 28.9 37.5 48.7General Expenses 1.7 3.0 3.9 5.0 7'5 8.4 10.9 14.1 18.4 24.0

Total Expenses 49.7 75.4 1 2 177.3 7776- 347. 77 2792. 967.3

Profit Before Tax 10.9 17.0 30.9 44.1 58.5 93.3 119.6 148.9 190.5 243.6Transfer to Special Reserve 1.1 1.7 3.1 4.5 5.9 9.3 12.0 15.0 19.0 24.5Tax 5.8 8.9 16.0 23.0 30.9 48.5 62.1 77.4 99.0 126.5Profit After Tax 4.0 6.4 11.8 16.6 21.7 35.5 45.5 56.5 72.5 92.6Dividend 3.0 4.4 6.7 8.9 10.9 15.9 20.6 23.6 28.4 34.6Net Surplus 1.0 2.0 5.1 7.7 10.8 19.6 24.9 32.9 44.1 58.0

September 3, 1976

INDIA



Condensed Balance Sheets 1971/72-1980/81(Rs M)

----------------------- Actual ------------------ -------------------- Projected -------------------

1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81

ASSETS

Cash on Hand and at Banks - 1 1 2 4 2 1 12 23 20IDA Loans - - 43 139 535 1,107 1,720 2,368 3,064 3,858IDA Debentures 54 660 1,250 1,676 2,483 3,492 4,661 5,900 7,237 8,772Other Loans 138 205 339 492 701 712 853 1,001 1,161 1,342Other Debentures 1,043 1,296 1,465 1,756 1,775 2,081 2,288 2,502 2,730 2,990Interest Accrued on Loans 3 3 8 15 33Interest Accrued on Debentures 31 50 83 114 158 227 298 433 542 685Other Assets 3 11 2 12 10 2 3 3 3 3

Total Assets 1,272 2,26I 9-9 12,219 14,760670

LIABILITIES AND CAPITAL

LiabilitiesBonds and Debentures 277 387 662 992 1,377 1,727 2,207 2,807 3,307 3,807Deposits 10 12 14 18 23 28 36 46 _Loans from GOI:

(i) IDA Loans 45 452 839 1,170 1,705 2,785 3,972 5,322 6,842 8,452(ii) Other Loans 727 796 796 796 796 796 679 529 309 239

Loans from RBI:(i) Long-term 50 345 54o 882 1,384 1,662 2,162 2,632 3,132 3,732

(ii) Short-term 34 37 116 45 17 - - - - _Other Liabilities 25 39 59 76 103 196 252 269 393 480

Total Liabilities 1 2,0 3,026 3,979 7,194 11,605 16,710

Capital

Paid-up Shares 100 150 150 200 250 350 400 45o 550 650Reserves and Undistributed Income 4 8 15 27 44 79 116 164 227 310

Total Capital 104 Jb8 165 227 294 429 516 614 777 960

Total Liabilities and 1,272 2,226 3,191 4,206 5,699 7,623 9,824 12,219 17,670Capital - - -

DB T/EQUITY RATIO 11:1 16:1 18:1 17:1 18:1 16:1 18:1 18:1 17:1 17:1

(Statutory Ratio 20:1)September 3, 1976 A 4-September 3, 1976

INDIA



Cash Flaws 1972/73-1980/81

(Rs M)

------------------ACTUAL------------------- -----------------------ESTIMATED-----------------------1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81

Resources:

GOI/IDA 477.2 386.5 331.2 534.7 935.0 1,067.0 1,187.0 1,520.0 1,641.0RBI/Bonds 414.8 586.4 733.8 990.1 985.0 1,313.0 1,409.0 1,331.0 1,505.0

Total Borrowings 892.0 972.9 1,065.0 1,524.8 1,920.0 2,380.0 2,596.0 2,851.0 3,146.0

Repayments from Borrowers 14.2 42.3 92.7 245.9 310.0 470.0 600.0 780.0 830.0Share Capital 50.0 -- 50.0 50.0 100.0 50.0 50.0 100.0 100.0

Sub-Total 956.2 1.015.2 1,207.7 1,820.7 2,330,O 2,900.0 3,246.0 3,731.0 4,076.0

Accretion to Reserves 3.7 8.3 12.2 16.7 28.0 36.0 47.0 63.0 82.0

Total Cash Inflow 959.9 1,023.5 1,219.9 1,837.4 2,358.0 2,936.0 3,293.0 3,794.0 4,158.0

Disbursements:

IDA Schemes 636.2 563.5 618.7 1,324.0 1,700.0 1,940.0 2,160.0 2,560.0 2,880.0Non-IDA Schemes 305.2 414.9 445.3 387.5 500.0 660.0 690.0 640.0 720.0

Total Schemes 941.4 978.4 1,064.0 1,711.5 2,200.0 2,600.0 2,850.0 3,200.0 3,600.0

Repayments to:

GOI -- -- -- -- -- 117.0 150.0 220.0 101.0

Bonds -- -- -- -- -- -- -- -- --

RBI 18.5 45.1 155.9 125.9 158.0 219.0 293.0 374.0 457.0 m4>

Total Cash Outflow 959.9 1,023.5 1,219.9 1,837.4 2,358.0 2,936.0 3,293.0 3,794.0 4,158.0

December 17, 1976

INDIA



Growth Since Inception(Rs M)

Position as at end of June 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

Share Capital and Reserves 50.0 50.0 50.0 50.0 50.0 50.0 50.9 52.3 1o4.4 108.2 165.0 227.2 294.0Special Deposit - 01.1 02.4 o3.6 o4.9 o6.1 07.4 08.7 09.9 11.7 14.1 17.9 23.0Subvention Loans 00.3 00.5 01.1 01.2 o0.4 o1.4 ol.4 o0.4 oi.4 01.4 -Borrowings(1) From GOI-IDA 50.0 50.0 50.0 50.0 80.0 257.5 447.5 667.5 771.3 1,248.5 1,635.0 1,966.2 2,500.9(2) Frcm IRI - - - - - - - 75.2 83.9 382.0 656.o 927.0 1,401.0

(i) Short term - - - - - - - 75.2 33.9 37.0 116.0 45.0 17.0(ii) Long term - - - - - - - - 50.0 345.0 54o.0 882.0 1,384.0

(3) Bonds and Debentures - - - - - - 109.4 194.6 277.1 387.1 662.1 992.1 1,377.1Refinance granted (net) - o4.5 49.0 69.7 126.3 304.0 588.9 889.3 1,234.1 2,161.4 3,097.4 4,068.6 5,493.9

(i) Debentures - o4.s 47.5 66.7 119.0 278.5 546.o 812.4 1,096.4 1,956.0 2,715.1 3,438.2 4,258.2(ii) Loans - - 01.5 03.0 07.3 25,5 42.9 76.9 137.7 205.4 382.3 630.4 1,235.7

Other Assets 20.5 00.5 01.2 02.2 05.1 12.2 15.9 25.8 36.0 63.2 92.9 141.7 201.7Investment and Cash Reserves 82.0 99.2 55.2 35.8 o8.s 05.2 25.0 100.3 00.2 oo.4 oo.8 2.6 3.7Gross Income 03.7 o4.o o4.3 05.0 o6.o 11.0 27.3 42.7 60.6 92.4 155.3 221.4 299.1Profits before Tax 03.5 o3.6 o3.9 04.4 04.3 o4.8 o6.7 o6.9 10.9 17.0 30.9 44.1 58.5Tax Payable 01.8 01.8 02.3 02.4 o2.4 02.6 03.7 03.4 o5.8 08.9 16.0 23.0 30.9Profits After Tax 01.7 01.8 01.6 02.0 01.9 02.2 03.0 03.5 05.1 08.1 14.9 21.1 27.6Dividend Paid 02.1 02.1 02,1 02.02.2.1 02.1 02.1 02.1 03.1 04.4 06.6 08.9 10.9

Source: ARDC Annual Report and Accounts.

September 30, 1976

vH

ANNEX 5Page 1

INDIA


Diversified Lending in Agriculture

Background

1. Agricultural production in India has increased during the last twodecades at a rate of 2.8% per annum with foodgrain and non-foodgrain produc-tion expanding at about the same rate. Compared with previous decades,increases in productivity came largely from bigger yields rather than fromincreases in cultivated area (Table 1).

2. Increased productivity has largely resulted from expansion of irri-gated area and greater use of high yielding varieties (HYV), of fertilizer andpesticides, (Table 2). In the period 1971/72 to 1975/76, gross irrigated areaincreased by 18% to 45.4 M ha, the area planted to HYV from 18.2 to 31.0 Mha (+70%), fertilizer consumption from 2.6 to 2.9 M tons of all nutrients(+12%), and the area treated with pesticides from 58.0 to 70.0 M ha (+21%);more data is in Tables 2 and 3.

3. Expansion of the irrigated area has been the main factor accelerat-ing production growth. Apart from enabling multiple cropping, it also reducesrisk of crop failure due to drought and, therefore, encourages use of moreinputs. Growth of gross irrigated area in recent years has been mainly dueto accelerated groundwater development.

The Fifth Plan (1974/1979) and Diversified Lending

4. The Fifth Plan calls for rapid growth in cropped area in order toincrease production (anticipating an expansion of over 2 M ha per yearaccompanied by an increase in the irrigated area of more than 11 M ha overthe Plan period). This total cropped area should increase from 169 M to180 M ha over the five year period. A major feature of the production programis the expanded involvement in agriculture of small, marginal, dry land far-mers and farm laborers through Small Farmers Development Agencies and DroughtProne Area schemes. In humid areas of the northeast and Kerala and in similarclimatic areas of the coastal belt and highlands, development of plantationand horticultural crops are to be given priority. These crops would servethe dual purpose of providing cash income and promoting soil conservation.Increased agricultural production is to be supported by strengthening admin-istrative and extension services and by increasing and up-grading staff andfacilities at State, District, block and village levels.

126

ANNEX 5Page 2

5. The Fifth Plan also envisages a program of selective mechanizationto complement other inputs for increasing cropping intensity and productivity.The present total level of energy available for agriculture production isonly about 0.3 hp per ha, of which 0.03 hp is mechanical power. Experience has

shown that in some areas, cropping intensity and employment have increased asa result of increased mechanization.

6. The Fifth Plan also lays emphasis on development of plantation andfruit crops; particularly in high rainfall areas where irrigation is notrequired. A large portion of plantation crop development (coffee, tea, coco-nut, pepper and cardamon) would come from a rejuvenation program in areaswhere adequate water is already available either through rainfall and/orirrigation. Many of these crops, e.g. coffee, tea, rubber, cocoa, cardamonand pepper are important sources of foreign exchange, and some are supportedby a strong institutional network in both the public and private sectors.

ARDC and Diversified Lending

7. During the last two to three years, there has been a substantialincrease in the number of schemes sanctioned by ARDC for diversified lending.

By the end of March 1976, ARDC had sanctioned schemes involving an aggregatecommitment of Rs 206 M; more than necessary to fully utilize the IDA alloca-

tion for that purpose under the first general line of credit. The ARDC re-finance of diversified lending, including non-IDA schemes, is expected toincrease from about Rs 580 M in 1975/76 to some Rs 860 M by 1980/81.

8. The need for LDB to finance diversified investments in agricultureis essential as in the course of time the scope for lending for minor irri-gation develoments will decline in most States, thereby affecting the LDBvolume of business. It has, therefore, been a deliberate objective of ARDCand RBI to impress upon LDB the need to diversify lending operations and the

response from some has been favorable. The bulk of schemes for diversifiedlending have, however, come from commercial banks.

9. The ARDC has a Technical Division with its head office in Bombayand branches at Calcutta and Lucknow, and a national panel of technicalexperts employed as consultants for specific technical appraisals. The LDB

and CB have been encouraged to establish their own technical units and suchunits are presently located in Gujarat, Maharashtra, Karnataka, Tamil Nadu

and Uttar Pradesh. Most of the expertise for these units is in minor irri-gation and land development. In addition, many technical publications areavailable from the Department of Agriculture, universities, colleges andprivate institutions and organizations, as guidelines for project formulation.

10. The ARDC and LDB rely heavily on technical staff of State govern-ments i.e., agriculture departments, statutory boards, State corporations,State educational and research institutions, as well as private institutions,for the identification and formulation of projects, and to give technicalguidance to farmers at all stages of planning and development. In addition,

127

ANNEX 5

Page 3

technical experts of these institutions assist and support project appraisalswhenever necessary. In the case of crops such as tea, rubber, coffee, seri-culture, etc., statutory boards have specialized experts who give advice andassistance before and after development. Due to the wide range u- diversifiedlending, the relatively small amounts to be disbursed in most States, and thescattered nature of most schemes, ARDC and LDB will continue to call uponoutside assistance for development of guidelines for economic and technicalappraisal of many projects.

Diversified Lending for Tree Crops

11. The national program for tree crop development is largely basedon rejuvenation of existing plantations and orchards, mainly coconut, mango,citrus and coffee.

12. Coconut: The present area planted to coconut is about 1.1 M hawith a production of 6,200 M nuts. Rehabilitation of coconut production isof prime importance if only to overcome the large and expanding gap betweeninternal demand and present production. Production has suffered a severesetback due to widespread disease in Kerala and Goa, and a major effort isbeing made to control as well as eradicate disease and rehabilitate existingplantations. There is potential for increasing and expanding production inKarnataka, Gujarat, Tamil Nadu and Andhra Pradesh. Yield increases of 10 to20% and more are readily achievable through the use of improved culturalpractices; too many farmers look upon coconut as a secondary crop; it isplanted on borders, along irrigation canals, etc., and given only casualcare and attention. Farmers are, however, beginning to realize that coconutscan be successfully intercropped to provide a regular source of cash income.Inter-cropping is particularly attractive to farmers with relatively largeholdings, enabling them to set aside part of their land for establishment ofcoconuts.

13. Although coconut is a good cash crop for the smallholder, his in-come suffers during the long gestation period. Consequently, GOI has recog-nized that promotion and establishment of plantation amd orchard crops onsmall holdings will often require a subsidy program such as has been proposedin Maharashtra under the SFDA scheme for the development of cashews, mangos,and coconuts.

14. Coconuts are normally planted on the lower flat land and requirewater for supplementary irrigation during the first two to three years; ona small scale, hand-watering is a common practice. Because of the traditionalsecondary nature of coconut cultivation, national average yields have beenvery low -- less than 25 nuts per tree. With a minimum of improved culturalpractices, national average yields of 40 nuts per tree could easily beachieved. Cultivators in Karnataka growing coconuts as a primary cropobtain yields of 60 to 100 nuts per tree.

128

ANNEX 5Page 4

15. Mango: Mango, like coconuts, are often grown as a secondary cashcrop. Demand is good for both fresh and processed fruit throughout thecountry. Even in the absence of an organized marketing system, farmers havelittle difficulty in selling their crop. Prices have been steadily risingand, although ARDC and LDB have been using a price of Rs 15 to Rs 20 per 100fruit for economic calculations, current prices of Rs 25 to Rs 30 per 100,have been reported. Yields of 400 to 500 fruit per tree are possible with astand of 100 to 150 trees per ha.

16. Mango is more attractive as a tree crop than coconut because morefarmers are familiar with its care and maintenance, having planted trees inthe past for family use. Interest and know-how exists on a wider scale;mango require only six years before coming into production.

17. The market for mango appears to be almost unlimited and the farm-gate price continues to increase.

18. Citrus: The citrus industry has been declining. Deterioratingproduction and increasing demand have resulted in a sharp increase in prices.Disease resistant varieties are now available which make citrus productionmuch more attractive, while marketing is better organized and packing housesand processing plants are being established.

19. Coffee: India produces over 90,000 tons of coffee annually ofwhich about 60% is exported. There is a national effort to upgrade existingplantations and establish new ones, with emphasis on small growers (less than4 ha). Karnataka leads in coffee production having more than 60% of thetotal of 0.4 M ha coffee under cultivation in India. Of the 85,000 ha ofcoffee in that State, about half is in holdings of less than 10 ha.

20. Indian coffee production has considerably increased during the pastdecade. Some of this is due to favorable weather conditions, as in 1970/71.However, steady increase in both production and yields are envisaged as re-planted areas come into production and farmers adopt new and improved culturalpractices -- in particular, use of irrigation and fertilizer. The nationalaverage yield of arabica and robusta coffee is about 500 kg per ha; yields of700 to 800 kg are common on better managed plantations. A dramatic priceincrease has occured recently, both on internal and export markets. Demandis expected to be strong and prices to continue to remain high.

21. Other tree crops: Demand for refinance for development of cocoa,rubber, tea, oil plam and cardamon has been limited, and this pattern islikely to continue. Production of these crops involves long term lendingof 10 to 15 years with disbursement throughout the period to maturity.Generally, these crops require exacting growing conditions and thus arelimited to selected areas. Cocoa, for example, requires a high rainfall dis-tributed evenly throughout the year, a uniform high temperature and deep soils,which retain moisture. All of these tree crops; cocoa, rubber, tea, oil palmand cardamon require a high uniform rainfall but availability of moisture canbe controlled by irrigation. Because of supplementary water requirements to

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produce these crops in many areas, it is recommended that cocoa be grown insuitable forest lands and intercropped with pepper and/or nutmeg.

22. Tea and rubber are regulated by statutory boards which also provideand arrange for finance. When refinance for these crops is requested fromARDC it always obtains a technical opinion as to suitability of soils, rain-fall, temperatures, etc., in the project area.

Lending for Dairy and Poultry

23. There is a general lack of enthusiasm by lending institutions forsmall (backyard) dairy and poultry loans except as part of organized schemeswhere management and supervision are available. The CB experience so far hasnot been good, thus farmers and bankers approach any such programs withextreme caution.

24. Small scale unorganized dairying and poultry generally suffer fromlack of management skills necessary to maintain healthy highly productivedairy cows or poultry. Native dairy stock only produce 500 to 600 litersof milk per lactation and crossbreeds 1,500 and 2,000 liters per lactation.At these levels of production dairy is considered a poor investment.

25. Experience with small scale poultry, less than 2,000 birds, hasusually been unsatisfactory with annual production ranging from 150 to 200eggs per bird; mortality rates are high and profits marginal at best. Layingflocks of 5,000 and more birds are becoming popular and the success rateis much higher as owners usually hire an experiencd farm manager; productionof 220 eggs and more per bird are common.

26. There will be some scope for financing organized dairy and poultryschemes, but it will be slow to develop. Poultry has better prospects becauseof the trend in scale and the investment required in equipment, land and build-ings. Small scale dairy, as often undertaken, requires minimal investment.Some farmers purchase crossbreed stock, but many small farmers simply useartificial insemination to upgrade existing stock. Thus credit is not gen-erally a constraint on small scale dairy development.

Lending for Fisheries

27. Schemes for development of fisheries are normally of the integratedtype involving catching or production of fish; processing and marketing, forboth inland and offshore operations.

28. Inland fisheries schemes include development of ponds, repairingof tanks and ponds, reclamation of shallow waters for fish culture, equip-ment and facilities for raising fingerlings and rearing and harvesting fish.Processing and marketing facilities may be provided where required. The

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project area must be carefuly selected to provide suitable water for fish cul-ture, together with adequate storage, transport and marketing facilities tomake the operation profitable.

29. Offshore fishery schemes include fishing boats and their equipment,including motors, and nets. They may provide for storage, processing andmarketing facilities as part of the project, if adequate facilities are notavailable.

Lending for Storage and Marketing

30. Schemes for development of storage and marketing usually includeconstruction of warehouses as determined by the Central Warehousing Corpora-tion. These warehouses are used for storage of farm produce and farm inputs -

seeds, fertilizer, herbicides, pesticides and equipment. Warehouse unitsmay be organized to act as marketing agents to purchase or store and marketfarmers' produce and inputs, and may include provision of transportationfor the collection and distribution of produce and inputs as well as packaging,grading and marketing equipment. Their main function, however, is to providesafe and controlled storage facilities for farmers to enable them to takeadvantage of seasonal fluctutations in prices and to reduce losses during theholding period.

March 1977

131

ANNEX 5Table 1

INDIA


Index Numbers of Area, Productivity and Production: 1949-O') to 1975-76

Index of PerArea Productivity Production Capita

Index* % Increase Index*% Increase Index* % Inerease Ptoduction

1949-50 82.1 89.8 72.8 100.01950-51 82.0 - 0.1 83.2 - 7.3 68.9 - 5.4 93.11951-52 83.5 1.8 83.7 0.6 70.3 2.0 93.5

1952-53 86.5 3.6 87.5 4.5 74.1 5.4 96.91953-54 91.3 5.5 96.8 10.6 83.9 13.2 107.71954-55 92.2 1.0 95.6 - 1.2 84.3 1.1 106.9

1955-56 94.4 2.4 91.9 - 3.9 84.4 - 0.5 104.31956-57 95.2 0.8 95.1 3.5 89.5 6.0 108.31957-58 94.2 - 1.1 89.4 - 6.0 83.7 - 6.5 92.2

1958-59 98.0 4.0 100.5 12.4 96.6 15.4 112.11959-60 99.4 1.4 95.7 - 4.8 94.3 - 2.4 107.01960-61 99.2 - 0.2 103.3 7.9 102.7 8.9 114.0

1961-62 101.4 2.2 101.0 - 2.2 103.0 0.3 111.91962-63 102.3 0.9 98.5 - 2.5 101.4 - 1.6 107.81963-64 102.1 - 0.2 100.8 2.3 103.9 2.5 108.1

1964-65 103.3 1.2 108.1 7.2 115.0 10.7 117.01965-66 100.9 - 2.3 92.2 -14.7 95.8 -16.7 95.31966-67 100.7 - 0.2 93.8 1.7 95.9 0.1 93.3

1967-68 105.0 4.3 111.5 18.9 116.6 21.6 111.11968-69 103.3 - 1.6 107.6 - 3.5 114.8 - 1.5 107.01969-70 106.2 2.8 112.7 4.7 122.5 6.7 111.7

1970-71 107.3 1.0 118.0 4.7 131.4 7.3 117.11971-72 106.7 - 0.6 117.3 - 0.6 130.9 - 0.4 114.31972-73 103.4 - 3.1 110.6 - 5.7 120.4 - 8.0 103.0

1973-74 109.4 5.8 117.1 5.9 133.4 10.8 111.81974-75 105.8 - 3.3 115.5 - 1.4 129.7(a)- 2.8 106.51975-76(a) 107.1 1.2 129.6 12.2 147.4 13.6 118.8

Annual rate of increase (%) between the triennia ended

1951-52 and 1964-65 1.7 1.4 3.2 1.21964-65 and 1975-76 0.4 1.5 2.3 0.1

1951-52 and 1975-76 1.1 1.4 2.8 0.7

(a) Estimated by the Center for Monitoring Indian Economy

* Base: Triennium ending 1961-62 = 100.

Source: Center for Monitoring Indian Economy, Basic Statistics relating to IndianEconomy, Volume I: All India, October, 1976.

January 28, 1977 132

ANNEX 5Table 2

INDIA


Progress of Agricultural Programs 1971/72 - 1975/76

Program Unit 1971/72 1972/73 1973/74 1974/75 1975/76-1

Gross area irrigated M ha 38.5 41.0 43.1 43.8 45.4

HVY 18.2 22.1 25.9 27.1 31.0

Plant protection 58.0 52.0 63.0 64.0 70.0

Soil conservation 1.5 2.1 1.6 0.6 1.0

Fertilizer use M t 2.6 2.7 2.8 2.6 2.9

Pesticide use 1,000 t 0.47 0.53

1/ Likely achievements.

Source: Center for Monitoring Indian Economy.

March 8, 1977

133

ANNEX 5Table 3

INDIA


Fertilizer Consumption in India(thousand tons of nutrients)

Year N P205 K20 Total

1952-53 58 5 3 661953-54 89 8 8 1051954-55 95 15 11 1211955-56 108 13 10 131

1956-57 123 16 15 1541957-58 149 22 13 1841958-59 172 30 22 2241959-60 229 54 21 3041960-61 212 53 29 294

1961-62 292 64 28 3841962-63 360 81 36 4781963-64 407 117 51 5751964-65 435 148 70 6531965-66 547 132 78 757

1966-67 839 249 116 1,2041967-68 800 237 130 1,1671968-69 1,131 389 154 1,674

1969-70 1,360 420 209 1,9891970-71 1,487 462 228 2,1771971-72 1,760 564 304 2,6281972-73 1,779 587 333 2,6991973-74 1,829 650 360 2,839

1974-75 1,774 478 339 2,5911975-76 2,148 466 278 2,892

Source: Center for Monitoring Indian Economy, Basic Statistics relating toIndian Economy, Volume I: All India, October, 1976

January 28, 1977 134

ANNEX 5Table 4

INDIA


Growth Rates of Production of 38 Major Crops: 1950-51 to 1975-76

Annual Rate of Increase (%)Between Triennia Ended

1/ 1951-52 1964-65 1951-52Crop-/ and and and

1964-75 1975-76 1975-76

1. Rubber 7.4 12.0 9.52. Safflower - 9.2 -3. Wheat 4.0 7.7 5.64. Potatoes 4.1 6.1 5.25. Ginger: dry 2.6 6.0 - 4.1

6. Ca&torseed - 0.9 -.9 1.77. Rapeseed and mustard 3.0 4.8 3.88. Coffee 6.8 4.0 5.59. Bajra 3.1 3.4 3.210. Nigerseed - 2.4 -

11. Tea 1.9 2.9 2.412. Cashewnuts - 2.7 -13. Tobacco 2.3 2.7 2.514. Sugarcane: gur 3.5 2.5 3.115. Arecanuts _ 2.4 -

16. Maize 4.3 2.1 3.317. Linseed 1.3 2.0 1.618. Rice 3.6 1.8 2.719. Barley - 0.3 1.8 0.620. Guarseed - 1.8 -

21. Cottonseed 1.5 -22. Coconut: copra - 1.4 -23. Cotton: lint 5.1 1.3 2.424. Groundnut: in shell 4.0 1.0 2.625. Tur - 1.3 0.7 - 0.4

26. Ragi 4.3 0.3 1.827. O-her pulses 1.3 0.3 0.828. Chillies: dry 2.5 0.3 1.529. Jowar 2.8 - 0.1 1.630. Small millets 0.1 0.1 0.1

31. Bananas - 0.1 -32. Pepper: black 1.1 - 0.2 0.533. Sesamum 0.9 - 0.5 0.334. Tumeric - -0.5 -35. Jute 3.2 - 1.3 1.1

36. Mesta 7.6 - 2.0 3.137. Gram 2.6 - 2.2 0.438. Sannhemp - -3.3 -

Foodgrains 3.1 2.4 2.8Non-foodgrains 3.4 2.1 2.8

All commodities 3.2 2.3 2.8

1/ Crops ranked in the descending order of growth rates between the period1964-65 and 1975-76.

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INDIA


Training

I. Background

1. Because of ARDC's increase in volume of work, diversification oflending pattern, growing attention to small farmers' needs, and concentrationon development in lesser developed States, it will place a great demand uponpersonnel of lending institutions at every level from headquarters to fieldstaff. This applies not only to the LDBs, the core of ARDC refinancing work,but also to CBs and several other institutions and agencies. For this reason,ARDC plans to intensify and expand in-service training to enhance staffcapability.

2. For many years, considerable in-service training has been providedfor staff of agricultural lending agencies. With establishment of the ProjectPlanning and Appraisal Course (PPA) at the RBI College of Agricultural Banking(CAB) in 1972, training was spread even more widely, regularized, and wasfocused on modern methods of project appraisal advocated by IDA. In thefirst general line of credit to ARDC in April 1975 (ARDC I), was a tripleapproach to the problem covering the two years 1976 and 1977 including: (a) atraining program for senior and middle level staff of certain types of creditinstitutions, centering on the Agricultural Projects Course (APC) which openedin September 1975 (US$200,000); (b) a study of the training needs of juniorlevel staff of LDB only (US$200,000); and (c) design and execution of a programfor training a substantial number of LDB junior staff in categories found bythe study to need training (US$400,000). Details concerning CAB and trainingconducted by other institutions can be found in Annex 6 of the Appraisal Reportof ARDC I (Report No. 562a-IN, March 15, 1975).

3. The project now proposed is designed to continue: (a) the senior andmiddle level in-service training which is currently well under way; and (b) thejunior level in-service training which will have been half completed by theclosing date of ARDC I if schedules are maintained.

II. Progress Under Previous Credit (ARDC I)

4. Under provisions of ARDC I, about 750 senior and middle level LDBstaff were to be trained at CAB by the closing date (December 31, 1977). Theprojected situation as at the middle of October 1976 is shown in Table 1.Table 1 shows that although the expectation is for 736 LDB staff to receive

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training by the closing date of ARDC I, only 630 will have received APC train-ing and only 530 of these will have been trained in the normal four-week APC atCAB.

5. The content of the existing APC is essentially the same as it waswhen it opened in September 1975. At that time, it had the approval of EDIrepresentatives, who had assisted in its design. It is similar to the earlierPPA course, which also had the benefit of EDI assistance and which impartedelements of modern appraisal methods (incremental benefit) to many LDB (andother) staff members for 1972-75. Adjustments in the overall curriculum ofCAB have been made in order to accommodate the rapid increase in CAB courses.A second channel of APC was opened in July 1976, doubling the number which canbe offered each year; this channel will be maintained at least through June1978. Additional capacity has to be provided by introducing two-week APC ineach of the six regions outside CAB, to accommodate trainees who could not bespared for the four-week period and, therefore, would otherwise receive notraining in modern project appraisal. It is not yet possible to judge whethertwo weeks will provide an adequate substitute, but it was clear to CAB that anearlier experiment with a shorter course was unsatisfactory; after beingoffered once, it was discontinued and redesigned before being transformed intothe two-week regional courses that are to begin in December 1976. The essentialdifferences are:

(a) instead of compressing all subjects in the four-week courseinto a series too brief to afford an understanding of each,the least central subjects are omitted and the essentialstreated in enough depth to be of value;

(b) the subject matter is focused on local crops and conditionsrather than being more diversified; and

(c) field work, which is a quarter of the four-week course, isomitted but practical case studies are retained.

Other problems inherent in giving this course at a distance from the CAB willbe mentioned in the discussion of ARDC II below.

6. The study of LDB junior staff training provided for under ARDC Iwas thoroughly executed by ARDC, although it took a longer time than expected;it was published in April 1976 and was studied by IDA in Washington in June.Problems of implementing the study are mentioned in paras 22-35.

7. The third training element in ARDC I was to proceed with the LDBjunior staff training program as rapidly as possible after IDA approval of thestudy's recommendations. The findings of the study have led to a reasonablebalance between uniformity of basic programs and adaptation to local condi-tions, with ARDC in a financial position to influence decisively the size andcontent of local programs. By November 1976, ten SLDB had begun training

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programs of the type envisaged in the study and most of the other seven SLDBwere currently preparing programs. The ten SLDB which had begun their trainingrepresented 70% of the total junior staff designated for training in all SLDB.By the end of October 1976, nine of the SLDB had established training centersand undertaken 18 courses under this program; these had given training to 550junior staff. Only one of the larger SLDB had not yet begun training. All canbe expected to commence before the closing date of ARDC I.

8. The Training Cell at ARDC headquarters was set up early in 1976.Training cells have been established in each SLDB in the form of two seniorofficers who will function as full time trainers throughout the program.

III. Training Program

A. Senior and Middle Level Staff

Long-Term Needs

9. The ARDC maintains that over the next three to five years, all seniorand middle level ARDC (318) and LDB (3,723) staff should have received trainingof the types conducted under ARDC I. Minimal training needs of CB and RegionalRural Banks (RRB) were roughly estimated at 2,000, RBI at 100, and Stategovernments and public corporations at 500. Omitting SCB staff, which wouldnot be included in the ARDC training program except on an incidental basis, theneed comes to about 6,600, with LDB staff to receive priority attention. Thisexcludes refresher training.

Training Accomplished and to be Accomplished

10. The following table shows that (on the basis of figures in Table 1)by the closing date of ARDC I, almost a quarter of the total will have receivedtraining, including about a fifth of LDB staff.

Training to October 1976 Training to end of 1977

LDB 226 (6% of need) 736 (20% of need)Other Institutions 265 (9% of need) 804 (28% of need)All institutions 491 (7% of need) 1,540 (23% of need)

Training to be Accomplished Under this Project

11. Table 2 shows that by the end of calendar 1979, the estimated clos-ing date of this project, it is expected that about 40% of SLDB needs and 45%of total needs will have been met, apart from any refresher courses that willeventually have to be mounted. Table 2 also shows that although the expecta-tion is for 785 more SLDB staff to receive training by the closing date of thisproject, only 620 will have taken an APC and only 450 of these will have beentrained in the normal four-week APC at CAB. Over the period of both credits(four years), the figures would be 1,521, 1,240, and 780, respectively.

1 3.3

ANNEX 6Page 4

Program for Training under this Project

12. Target numbers are of no value unless they can be attained with agood quality of training delivered and absorbed. A practical program hasbeen designed to achieve this.

13. APC. The heart of the program will continue to be the APC at CAB,Poona. This course has received considerable attention and assistance, inboth design and execution, from EDI over several years, beginning with itspredecessor, the PPA course. By now it has had a substantial impact on thepractice of credit appraisal throughout the country. The increase in thenumber of courses being given at CAB does not seem to affect the quality ofthe training in the short run, as faculty has been augmented to handle twosimultaneous courses. In the long run, however, the lack of time for courseevaluation and for preparation of new materials may be felt. Additionalfacilities have been approved which will enable CAB to expand, reinstitutingcertain standard courses that have been suspended to make rcoux for the increasein APC work and the new course for RRB staff. Three of the senior faculty, inaddition to the Principal, have completed the EDI course. Course content ofAPC is considered by EDI to be suitable. Techniques of instruction could bemodernized, but that is not essential and is not an element in this project.

14. Regional APC. The innovation in APC is the short regional coursedesigned to transmit the essentials of modern appraisal in two weeks insteadof four. These are designed and administered by ARDC rather than CAB, usingone full-time coordinator for each course and a series of visi-ing lecturers.These courses omit the one-week field trip and its analysis, the work onteaching technique, and certain elements of the four-week APO which are con-sidered less applicable to the characteristics of the region. For example,of the six regional courses planned, the one for northeast wnuld emphasizeplantations and horticulture, and the one for the central region would empha-size land development, command area development, and farm mechanization. Thefirst of these courses is to take place in December 1976, with 15 more to begiven by the end of 1979. Each would accommodate 35 participants, of whomabout half would be SLDB staff. Only those who could not be spared for thefour-week course at Poona and those who were more concerned with specificprojects in the region, would be admitted to these regional short courses.

15. Trainees. The main constraint on expansion of SLDB participation inthe APC (and therefore on increasing the number of APC) has been the availabil-ity of staff members as trainees. By increasing the number of courses duringthe "lean periods" only (July-November generally) and through proselytingactivity by ARDC and CAB, earlier doubts have been modified. At the beginningof October 1976, there was a waiting list of 450 for the APC--200 of thesefrom SLDB - and by late November the number had grown to 800 and 300, respec-tively. However, this is a list "in perpetuity", so that it is not a reliablereservoir assuring an adequate supply for any particular course. The standardproblem (in any training program) of providing candidates who have adequatepreparation and potential can be solved only by insisting upon training someof the best qualified staff first, to foster a habit of training those whowill be the most useful in the future rather than those who can be sparedmost easily. 139

ANNEX 6Page 5

16. Trainers. Faculty of CAB has been mentioned above. For the shortregional APC, instructors will come on a visiting basis except for one coor-dinator. These would be mainly ARDC staff from headquarters and regionaloffices, who are considered to have adequate knowledge and experience in thesubjects they will teach. Several are regular visitors to CAB courses andtheir ability is known. Others will have had virtually no teaching exper-ience. Other visiting instructors will be drawn from CB, State governmentdepartments, and elsewhere, usually on a single-lecture basis. Many of thevisiting instructors will have no opportunity to know the trainees they areinstructing. Under such conditions, a great deal of any success achieved willdepend upon the ingenuity of the course coordinator, who will be seconded fromthe CAB faculty, and as well, upon monitoring supplied by the Training Cellat ARDC headquarters (see para 18).

17. Facilities, Materials and Equipment. Physical facilities at CAB arevery good and continually improving. Training materials and equipment are alsoimproving and are adequate for teaching in traditional ways. For the shortregional APC, facilities will be rented or borrowed, usually from an existingGB training college or center; there are many throughout the country that aremore than adequate. These will include equipment, which, judging from a smallsample, is likely in better colleges and centers to be about the same as thatused at CAB. Training materials will be prepared by ARDC, in consultation withCAB. Many of the CAB materials will undoubtedly be used, but other items willhave to be produced at ARDC headquarters. The Training Cell's director isfully aware of the difficulties and believes they can be overcome by existingstaff.

18. Organization and Monitoring. Success will depend largely upon thework done by the ARDC Training Cell of eight professionals and one clerklocated at headquarters in Bombay. This is headed currently by an experiencedsenior officer who was formerly Principal of CAB and is a graduate of EDI.His two deputies are also senior officers with relevant experience. The Cellreports directly to the Managing Director and will probably continue to do sounder the forthcoming reorganization. These three members of the Cell plan tospend much of their time in the field monitoring the junior training program(see para 35) and will also visit regional APC. The other five will remain atheadquarters administering the program and helping to prepare training mate-rials for regional APC and (mainly) the junior level training program. It isquestionable whether under these conditions sufficient attention will be paidto training materials, but the director of the Cell is confident on this pointand accepted the suggestion that the National Institute of Banking Management(NIBM) should be asked to assist to a greater extent than in the past.

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B. Junior Level Staff

19. The in-depth study conducted in 1975-76 by ARDC and SLDB of juniorlevel staff training needs has provided figures for the following estimatesand the basis for programs discussed below. ("Report on the Estimate of theLDB Junior Level Staff and their Training Needs", dated April 13, 1976.)

Total Needs

20. Of the 21,275 staff members of the 19 LDB (including regional andDistrict offices, branches and PLDB) throughout the country, about 17,550 arecategorized as junior level. It has been assumed that the number will remainsubstantially steady over the next few years and that for working purposes,this will be the number to receive initial training (disregarding bothrefresher training and turnover). All are considered to need specializedtraining planned under this program by the end of calendar 1979, regardlessof their previous training.

Training Accomplished and to be Accomplished under ARDC I and ARDC II

21. The study divided junior staff into three groups, by level of staffposition, and determined that 100% of Group I (the highest), 50% of Group II,and 33% of Group III should receive training by the end of calendar 1977.These total about 8,800 and are considered the "critical categories" of juniorstaff. By the beginning of November 1976, about 550 staff members of nineLDBs, had already received training in the four-week courses approved by ARDCunder this program. This is about 6% of the 8,800. The junior staff trainingproposals of 11 LDB have been approved by ARDC for financing. The entireprogram through calendar 1979, and the presumed closing date of this project,is as follows:

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Program for Training LDB Junior Staff

Trainees Trainees1976 & 77 1978 & 79

Andhra Pradesh 1,606 625Assam 40 14Bihar 768 599Gujarat 730 797Haryana 285 253Himachal Pradesh 56 63Jammu & Kashmir 30 30Karnataka 494 832Kerala 107 216Madhya Pradesh 638 905Maharashtra 1,541 1,375Orissa 156 235Pondicherry 10 0Punjab 304 506Rajasthan 413 414Tamil Nadu 768 941Tripura 15 6Uttar Pradesh 519 767West Bengal 308 186

Total 8,788 8,764

Program for Training under this Project

22. General. After a sampling of job descriptions and qualifications ofincumbents, an analysis of vertical and horizontal mobility, and an assessmentof existing training arrangements, the ARDC study proposed a four-week analyt-ical course for Groups I and II and a four-week induction course for Group III.These courses are to be organized and conducted by SLDB themselves in theappropriate local languages. Each course will have about 30 participants;those LDB with fewer than 30 junior staff members will send them to a courseat a neighboring SLDB.

23. Course Content. The core of each four-week course is to be appraisaland recovery methods under the project approach to lending (incremental benefit)as taught in the APC. However, their objective, and hence the treatment of thesubjects, would be different from that of APC. Junior staff would not be ex-pected to master the techniques, but would instead be made acquainted with thepurpose and significance of those techniques and the terms and concepts usedin the analysis. They would also be trained in methods of collecting inform-ation needed to enable middle and senior level officers to do project apprai-sals, so that all three levels would have the same understanding of what wasto be done and why.

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24. Suitable syllabi have been worked out by ARDC (Appendix IX of thereport cited in para 19), discussed with some of LDB and finalized as guide-lines for LDB in designing their courses in such a way that ARDC can approvethem for financing. The four-week duration will be uniform, even though SLDBpreference during the study varied from two weeks to ten weeks. There will bethree weeks of classroom and one week of field work.

25. Trainees. Availability of trainees is assured by several featuresof the program. The courses will be given only during the lean period of work(July to November or December), so that staff will not be interrupted duringheavy recovery periods. Training will be in the local language. Traineeswill not have to travel outside the State. Furthermore, a planned, regular-ized program will normally find a place in the total annual work program whicha sporadic effort will not.

26. Quality of trainees cannot be assured, since all junior staff willbe expected to participate and some are obviously more trainable than others.The half selected for training during the first two years will usually be thebetter qualified, as the more critical posts are scheduled to receive firstattention. A better assessment of trainability can be made after experiencewith a few courses so that course content and method can be adjusted accord-ingly. This is the trial and error method, but anything more pedagogicallysound would be too complicated for acceptance and execution. Trainees willhave to be taken as they are, especially during the second two-year period,although experience with the training program may even have a beneficialeffect upon future recruitment policy of LDB.

27. Trainers. Special effort will have to be exerted to provide goodtrainers, as the entire program in an LDB can fail at this point more easilythan at any other. The ARDC recognizes this fact clearly and believes thatthe LDB agree. Each LDB has already designated two of its senior officers astrainers for each training center. They will prepare and organize coursesand will devote full time to training during the training season. They willhandle about half the instruction personnally; guest instructors from ARDC,ACD, other LDB, State government departments, and elsewhere, will handle theother half. Of the 48 trainers designated by October 1976, 22 were graduatesof APC at CAB; another 12 were in APC during November. The CAB is givingpriority to trainer-designees for admission to the next few APC.

28. The APC is not by itself sufficient to produce a good trainer outof an experienced officer; furthermore, not all the trainers will have anopportunity to attend APC before instructing. For these reasons, workshopsfor trainers are needed as soon as possible. One has already been held at theStaff Training College of RBI (Madras), organized and conducted by ARDC for32 trainer-designees from 11 LDB. Instructors in this workshop were subject-matter specialists, including some experienced trainers, from ARDC, NIBM, andelsewhere. This one-week session emphasized practical exercises in coursedesign and programming rather than techniques of classroom presentation. Some

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attention was given to the main subject matter to be offered junior staff intheir courses, with the object of: (a) distinguishing the role of juniorstaff in this process from the role of others; and (b) imparting as much asthey need to know about project appraisal and recovery.

29. It is obviously not possible for someone himself unacquainted with

that process and outlook to mark off the portion which junior staff shouldknow, and this will be a weak link in the chain of training where the trainerhas not himself learned the substance at CAB or elsewhere. By the 1977 leanperiod, however, all trainers will almost certainly have been through both theworkshop and APC in addition to their field experience.

30. Two workshops can handle 60-70 trainers, more than the total numberto be appointed. Since one week of training is not enough to make a goodtrainer out of a good normal practitioner, a series of five more workshops invarious regions is planned for 1977 and ten more over 1978 and 1979. Each,after the first two, will focus on a different feature of the training process.The ARDC will try to conduct the first few as early as possible in 1977. TheARDC has been urged to make as much use as feasible of the expertise of NIBMin teaching techniques. There is no way of knowing at this point how effectivethese workshops will be; they should be evaluated by ARDC before many sessionsare held, with a view to revision.

31. Training Materials. Three aspects of the training materials problemhave to be faced. One is the translation of existing materials (distributedby ARDC before course announcement) into regional languages; this is easilydone by LDB concerned or, in the Hindi-speaking area, by a group of LDB.Another is the production of materials which do not exist; ARDC has compileda list of a dozen such topics. This is a task which ARDC may have underrated,as the topics are broad and sometimes complex. The chief of training at ARDCfeels confident, however, that his Training Cell can produce these materialsitself when necessary, with the help of NIBM and other consultants. The ARDCalso believes that LDB will prepare materials locally that cover topics rele-vant specifically to individual LDB. Three LDB have been visited and no suchmaterials were evident as yet. The ARDC is aware of these current deficienciesand is pressing LDB to provide these materials.

32. The third aspect is the most difficult -- the conversion of rawtraining documents into good training materials. A great deal of sound infor-mation exists, but much of it is in the form of lectures delivered by guestfaculty at CAB and other training institutions. Much of this "raw" materialshould be converted into manuals, texts, exercises, graphics, etc. Case stud-ies have been produced and used at CAB and are considered to be one of the mosteffective training devices in any context. Yet there are not enough of theseand CAB faculty has little time to produce more. Adaptation of existing infor-mation to become good training materials and production of new case studiescan be expected to some extent from the trainers of junior staff, but theamount and adequacy of this material and its interchangeability among LDB aredoubtful. This is another area of concern which will need sharp attentionfrom ARDC and emphasis in the workshops for trainers.

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ANNEX 6Page iO

33. Facilities and Equipment. Except for the smaller ones, each LDBwill need a classroom, a hostel, offices, and a small library including audio-visual equipment. Of these, seven already have their own training centers orhave immediate plans to acquire them, and seven others need most or all of thefacilities but have no immediate prospects. Nevertheless, some of thosewithout permanent facilities of their own have conducted at least one courseunder the new program. Although lack of joint living reduces training effec-tiveness, there are some LDB where living separately in the town is the onlysensible solution.

34. The adequacy of training equipment is unknown, but ARDC is aware ofthe importance of such basic aids as overhead projectors and slide viewerswhere available training materials warrant their use.

35. Organization and Monitoring. The ARDC Training Cell (para 18)expects to spend most of its time on the junior staff program; this will beessential to its success. Analysis shows that the three senior members ofthe Cell could visit all LDB once a month during the lean (training) periodby traveling in the field three weeks out of each month. During the rest ofthe year, they could visit each SLDB bi-monthly by spending about one week permonth in the field. This would require them to be away from headquarters onaverage about half the working year in order to monitor the junior trainingadequately on the ground. At LDB level, a senior official at each Bank wouldbe in charge of the two training officers on a part-time basis and would beresponsible to the Managing Director.

IV. Cost

36. Both programs in this proposed project are estimated to cost aboutUS$2.0 M, allocated as shown in Table 3.

March 1977

145

INDIA


Training of Senior and Middle Level Officers Under ARDC I(Status as of October 1976, omitting possible refresher courses)

Trained throughMid-Oct. 1976 Additional Training Projected through Dec. 1977

Other 1/ Long APC Short APC Other 1/ Total ProjectedInstitutions APC Courses Total (at CAB) (Regional) Courses Total to end of 1977

LDB 215 11 226 315 100 95 510 736

CB 159 12 171 240 83

ARDC 33 25 58 54 20

RBI 3 18 21 4 2 116 539 804

SCB 6 - 6 5 2

State govern-ments, publiccorporations, 3etc. 10 1 11 10 3 _ _

Total 426 67 493 628 210 211 1,049 1,540

1/ Mainly 2-week technical courses in such subjects as hydrogeology, water management, land improvement,,poultry, dairy, and fisheries for relevant technical staff members.

H41

H 0A

INDIA


Projected Training of Senior and Middle Level Officers

Projected for Calendar 1978 Projected for Calendar 1979

APC APC Total ProjectedLong Short Other 1/ Long Short Other 1/ by Closing Date

Institutions (at CAB) (Regional) Courses Total (at CAB) (Regional) Courses Total (end of 1979

SLDB 250 100 85 435 200 70 80 350 785

CB 110 100

ARDC 36 30110 135 415 70 130 350 765

RBI 2 3

SCB 10 7

State govern-ments, publiccorporations,etc. 12 10

Totals 420 210 220 850 350 140 210 700 1,550

1/ Mainly 2-week technical courses in such subjects as hydrogeology, water management, land improvement,poultry, dairy, and fisheries for relevant technical staff members.

41~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~> X

INDIA


Estimated Training Cost - Project Period 1978 and 1979 (Calendar)

No. of Trainees/ No.of Duration Cost/Courses Course Trainees (weeks) Course Cost Cost

-------Rs ------- US $

Senior and Middle Level Staff

APC at CAB 22 35 770 4 65,000 1,430,000APC in Regions 10 35 350 2 35,000 350,000Technical Courses 10 30 300 2 19,000 190,000Management Seminars (non-officials) 2 20 40 1 12,000 24,000Seminars for Chief Executives (LDB & CB) 2 25 50 1 12,000 24,000Workshops for RBI & ARDC Senior Staff 4 10 40 1 10,000 40,000

Sub-Total 50 1,550 2,058,000 228,667

Junior Level Staff

Courses at LDB Centers 292 30 8,760 4 45,000 13,140,000Workshops for Trainers (ARDC, Regional) 10 30 300 1 8,000 80,000

Sub-Total 302 9,060 13,220,000 1,468,889

ARDC Headquarters Expense Allocation

Committees (Internal Group on TrainingSteering Group on Junior Training) -Meetings & Travel 100,000

Training Cell Staff (Salaries & Benefits) 1,000,000Travel (Monitoring Programs and Lecturing) 500,000Office Space, Utilities, Supplies &Communication 250,000

Equipment (mainly Reproduction) 350,000Evaluation & Research (Consultants) 50,000Miscellaneous & Contingency 20,000

Sub-Total 2,270,000 252,222

Groundwater Survey 450,000 50,000

Total 352 L0.610 17.998.000 1.99

April 19, 1977

(D

ANNEX 7Page 1

INDIA


Small Farmers Development Agencies

1. The Small Farmers Development Agencies (SFDA) definition of a smallfarmer is "a cultivator with landholding below 5 acres; in case of Class I

irrigated land as defined in the land ceiling legislation of the State, the

ceiling will be 2.5 acres".

2. The main functions of the Small Farmers Development Agencies are:

(i) to identify the eligible small farmers on the basis of potential viability

and investigate their problems; (ii) formulate economic programs for making

them viable; (iii) promote rural industries; (iv) evolve adequate institu-tional, financial and administrative arrangements for implementing variousprograms, (v) promote creation of common facilities for production, storage,

marketing, etc., and (vi) strengthen the existing cooperative institutionsthat provide credit, help develop functional cooperatives and strengthentheir supervisory personnel. The first task expected of them was to carry

out surveys in villages and to identify about 50,000 families to begin with

and prepare production and investment plans for them. The programs for im-proved agriculture include land development, soil conservation, minor irriga-tion, horticulture, demonstration and introduction of new and improvedvarieties and cropping pattern while those for subsidiary occupations includedairy, poultry, piggery, sheep and goat rearing and also fisheries. Theresources for the program are made available to the participants in theshape of subsidy (25% in the case of small farmers and 33 1/3% in the caseof marginal farmers and agricultural laborers), and loans from institutionalsources.

3. There are about 40 M farms that operate less than 5 acres, the upper

limit for SFDA beneficiaries, 2/3 of which (27 M) operate less than 2.5 acres.The 160 SFDA schemes now in operation have identified 8.5 M beneficiaries 1/(about 50,000 per scheme), 619,000 of which have benefited under minor irriga-tion and animal husbandry programs. Total expenditures on the program hasbeen Rs 850 M during the period of its existence (1970/71 to 1975/76) orRs 100 per identified participant and Rs 1,370 per actual beneficiary. Eachscheme has a budget of Rs 15 M for five years but no scheme has been able to

utilize these funds and in no case has it been possible to reach more than 20%of the identified beneficiaries. The small farmer category shows a higherproportion reached, while the share reached in the marginal farmers/agricul-tural laborer category has been correspondingly less. The reasons for this

1/ Including agricultural laborers.149

ANNEX 7Page 2

disappointing state of affairs may be that economics of scale and fragmenta-tion of land make groundwater development on small holdings uneconomic andthat creditworthiness criteria prevent the program from reaching the poorest.

4. The allocation of SFDA to States is shown in the following table:

Allocation of Agency Units to States

State/Union Territory Total Agency Units

Andhra Pradesh 15Assam 4Bihar 18Gujarat 6Haryana 3Himachal Pradesh 3Jammu & Kashmir 4Karnataka 7Kerala 4Madhya Pradesh 12Maharashtra 12Manipur IMeghalaya 2Nagaland 1Orissa 7Punjab 4Rajasthan 6Tamil Nadu 12Tripura 1Uttar Pradesh 26West Bengal 1Goa, Daman and Diu 1/2Pondicherry 1/2Delhi 1/2Arunachal Pradesh 1/2Sikkim 1/2Other 8 1/2

160

March 1977

150

ANNEX 8Page 1

INDIA


Monitoring, Evaluation and Reporting

A. Introduction and Background

1. Monitoring is defined here as timely collection and analysis ofselected data to provide management with information important for currentdecision making on project constraints and progress, and indication of im-plementation problems requiring corrective actions. Evaluatior. is analysisof project results. It consists of 'on-going evaluation', i.e. continuousanalysis during implementation, and 'ex-post evaluation', i.e. analysis afterproject completion. Reporting deals here with the flow of information fromARDC to IDA.

2. The ARDC lending program covers a large number of investment cate-gories in minor irrigation (pumpsets, shallow tubewells, deep tubewells,etc.), and diversified purposes (livestock, fisheries, horticulture, etc.);it is implemented through several thousand schemes throughout india. Themagnitude, diversity and geographical distribution of investments financedthrough the program, make its monitoring and evaluation difficult and consider-able progress would have to be made, particularly with evaluation, in orderto reach a satisfactory level. The existing systems are reviewed below andguidelines for improvements are provided.

Existing Monitoring

3. The ARDC current monitoring system consists of quarterly reportsfrom participating banks, which provide data on financial and physical pro-gress of each scheme, and field supervisions termed by ARDC 'follow-up' studies,of selected schemes conducted by ARDC regional staff. The main objectives offollow-up studies are:

(i) to review physical and financial progress, reasons for short-fall, and procedural as well as operational difficulties;

(ii) to determine whether proper use of funds has been made andsecurities are adequate;

(iii) to ensure that terms and conditions of sanctions have beenfollowed, and examine the extent of adherence to appraisalmethods suggested by ARDC; and

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ANNEX 8Page 2

(iv) to review lending bank arrangements for supervision and veri-fication, and ascertain adequacy of supporting services.

During a follow-up study, lending bank branches implementing the s&.eme arevisited, loan records inspected, field visits made and beneficiaries inter-viewed. During the field visit, the investment is inspected for conformitywith technical criteria (e.g. type of pumpset, distance from nearest well)and adequacy of services such as farm supply, extension and credit are checked,as well as the size of the command area land use and yields. A report speci-fying the main findings and requesting corrective actions is then sent by ARDCto the lending bank which takes appropriate action. During 1976, ARDC con-ducted about 250 follow-up studies.

4. Follow-up studies are essential for control of loan utilization andprogress of schemes as well as for direct contacts with farmers. While super-vision level has so far been satisfactory, the following main deficienciesrequire attention:

(i) the method of beneficiary selection for interviews is unsatis-factory and the size of sample may be too small;

(ii) forms used are not standard and questionnaires are often toolong;

(iii) reports include lengthy case descriptions but lack quantifica-tion of the main findings; and

(iv) insufficient analysis and utilization of results.

Existing Evaluation

5. The ARDC evaluation unit was set up in January, 1974, and has con-centrated on ex-post evaluation studies with the following objectives:

(i) assess farm-level benefits of schemes and farmers' difficul-ties in obtaining them;

(ii) identify the main categories of beneficiaries;

(iii) identify deficiencies in project formulation, appraisaland/or execution in order to improve future appraisal; and

(iv) provide input-output coefficients for appraisals.

Progress with evaluation activities has been slow because the resources commit-ted to this purpose have been inadequate. ARDC has completed evaluation studiesof four minor irrigation schemes (results are summarized in Annex 1), hasassisted in design and analysis of farm benefit survey of Gujarat AgriculturalCredit Project, and has been preparing plans for evaluation studies of addi-tional schemes. The small number of studies has been largely a result of theARDC tendency to limit the number of studies to its staff capacity rather than

152

ANNEX 8Page 3

to sub-contract them to research institutions. Also, the time lag betweenevent and study results, which is unavoidable in ex-post studies, has reducedthe usefulness of findings for operational purposes. The contribution ofevaluation activities to the fulfillment of objectives, and impact on manage-ment decisions have, so far, been small.

B. Proposed Monitoring and Evaluation

6. Methodology. Crucial to improvement of the monitoring and evalua-tion systems, would be development of a cost efficient monitoring and evalua-tion methodology suitable to local conditions which would cover the followingissues: (i) definition of clear and limited objectives; (ii) what inform-ation is required; (iii) method of sampling; (iv) what method of data col-lection should be used? expensive method generating accurate data (e.g. fre-quent visits of farmers) or low cost method, generating less accurate ones;(v) which information should be collected in the course of follow-up studiesand which through evaluation studies; (vi) the possibility to use researchinstitutions; (vii) utilization of on-going agricultural surveys and studies;(viii) utilization of monitoring and evaluation systems of the participatingbanks; (ix) data processing; (x) presentation and utilization of results; and(xi) ARDC role: should it be mainly supervisory and advisory or should itconduct surveys. All these issues must be resolved at an early stage. Expe-rience has shown that evaluation and monitoring systems which are not properlydesigned and implemented, may become expensive, accumulate unnecessary data,have doubt cast on results' reliability and, therefore, create confusion ratherthan improve knowledge. There has been considerable experience in India withsampling techniques, questionnaire design and data collection methods. Uti-lization of this knowledge for design of an efficient monitoring and evalua-tion system would require considerable thought and experimentation. A ProjectEvaluation Task Unit would be established by ARDC by December 31, 1977 forthis purpose, and would operate throughout the project period. This unitwould consist of 3 to 4 senior staff who have had previous experience withdesign implementation and analysis of surveys and would be either seconded toARDC or directly recruited, and would be free of routine duties. It wouldpropose improvements to the monitoring and evaluation system, supervise imple-mentation and evaluate their effectiveness. It would assist to design a net-work of surveys and studies and pay particular attention to the problem oftimely data processing and to the utilization of results by management. Thesystem designed would follow the general guidelines outlined below.

7. Monitoring. During the project period, follow-up studies would an-nually cover several hundred schemes, in the course of which several thousandbeneficiaries would be interviewed. With adequate selection and data analysis,a sample of this magnitude should provide management with important informationon project progress and constraints. The ARDC would, therefore, revise thebeneficiary selection by experimenting with several alternative beneficiaryselection designs and comparing the results.

153

ANNEX 8

Page 4

The beneficiary questionnaire would be standardized by type of investment,be short and concentrate on indicators important for achievement of plannedbenefits. For example, in the case of minor irrigation investments, importantindicators besides the technical ones (distance from nearest well, depthsetc would be: ki) investment cost; (ii) time of electrification; (iii) sizeof command area; (iv) sale of water; (v) cropping patterns; (vi) availabilityof services (extension credit, inputs); and (vii) technology used (or to beused). It may however, be premature at the time of follow-up study to quantifyincremental production. The beneficiary questionnaire would consist of twomain parts: (a) basic information on the investment and the beneficiary; and(b) information specific to the scheme supervised. Part (a) of the question-naire should include a set of questions on income and employment which wouldenable ARDC to classify the beneficiary by income category in greater preci-sion than is possible using the standard definition of small farmers. Thereport would quantify the main findings (percentage, averages). Data frompart (a) of all follow-up studies would be analyzed quarterly, by investment,for each State and for the country as a whole, and results would be incor-porated in ARDC quarterly reports sent to IDA. Examples of such results are:

(a) percentage distribution of beneficiaries by income category;

(b) percentage of loans which were misutilized;

(c) average cost of investment;

(d) average size of command area (minor irrigation);

(e) average time between the installment of a pump and itsenergization;

(f) average length of construction period;

(g) percentage of farmers who use (or intention to use) ofimproved technology; and

(h) percentage distribution of beneficiaries' rating of theadequacy of vital services (such as farm-supply, extension,credit).

The collection and analysis of data obtained from the lending banks would also bestandardized.

Evaluation

8. Information on investment costs, category of beneficiaries anddeficiencies in project formulation, appraisal and execution would come fromthe follow-up studies (see para 7). The evaluation system would mainly pro-vide factual information on costs, benefits and financial viability at bene-ficiary level, of the main agricultural investments refinanced by ARDC. Thisinformation would be used for policy decisions, for example which investmentsshould be encouraged, loan repayment period, and as a feed-back of input-output coefficients for planning of future investments. The benefits and the

154

ANNEX 8Page 5

costs of most agricultural investments are affected by climatic conditionsand vary from year to year. Their evaluation would therefore require a con-tinuous collection and analysis of data over a period of several years. Giventhe variety of investments and their geographical distribution it would bedifficult to achieve a satisfactory coverage without a maximum utilization ofon-going surveys and studies in each state (see Appendix 1).

9. A coordination committee for agricultural surveys and studies (CCAS)would be established for this purpose initially in a few (about five) States.CCAS, whose secretary would be from ARDC, would include represenatives of Stategovernment (Ministry of Agriculture, Department of Statistics), banks and uni-versities and would meet at least quarterly. It would start its activitieswith a comprehensive review of the need for evaluation data and the possibilityto obtain it through improvements of on-going surveys, and would initiate newsurveys. It would endeavor to direct socio-economic research done by univer-sities towards evaluation of agricultural investments. Where necessary, costof new studies would be shared between the ARDC and banks.

10. Evaluation Results During Project. In the longer run, it is anti-cipated that, ARDC would gradually change from actual implementation of eval-uation studies, to advisory, supervisory and coordinating roles. However, asthe activities of the Evaluation Task Unit and CCAS are unlikely to generateevaluation results before the end of this project, ARDC would have, as a shortterm measure, to increase the number of studies directly conducted by itsstaff. During the project, evaluation results would come from the followingmain sources:

(i) ten evaluation studies of schemes;

(ii) about ten project completion reports (PCR) for IDAfinanced projects; and

(iii) brief end-of-scheme reports.

11. The following ten evaluation studies would be completed during theproject: (i) land development in Andhra Pradesh; (ii) land development inKarnataka; (iii) minor irrigation in Karnataka; (iv) deep and shallow tube-wells in Haryana; (v) citrus in Andhra Pradesh; (vi) dairy in Maharashtra;(vii) dairy in Haryana; (viii) poultry in Andhra Pradesh; (ix) poultry inMaharashtra; and (x) fisheries in Karnataka. About two of these studies wouldbe sub-contracted to research institutions and the rest would be conductedby ARDC staff.

12. Project completion reports (PCR) which would include a considerableamount of evaluation data would be prepared during the project period fornine IDA financed agricultural credit projects in the following states:Maharashtra, Tamil Nadu, Andhra Pradesh, Karnataka, Madhya Pradesh, Haryana,Uttar Pradesh, Punjab and Bihar. A PCR would be prepared also for ARDC I.

13. Brief end-of-scheme reports would be prepared by ARDC for schemescompleted during the project period in order to summarize the lesson learned

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ANNEX 8Page 6

and utilize it for improvement of design of new schemes. In view of thelarge number of schemes completed, the reports would be initially preparedfor a sample of 30 schemes. They would be based on staff experience, resultsof follow-up studies, correspondence and other material from the scneme'sfile. Guidelines are provided in Appendix 2.

14. Evaluation results for investments in fisheries would be availableto ARDC as a result of surveys and studies planned under IDA financed GujaratFisheries Project. The ARDC would endeavor to obtain the results of any relevantevaluation study conducted throughout the country which would be publishedduring the project period.

C. Reporting

15. The ARDC issues monthly, quarterly, and annual reports. A copy ofthese reports with a special IDA supplement is sent to IDA. Care has been takenby IDA to limit supplementary information requirement to data needed foreffective management and information on actual utilization of IDA funds. Underthis project, ARDC would continue providing IDA with quarterly and annualreports and their supplements, according to guidelines provided below, andwould prepare the format for the returns, to be agreed by IDA.

16. Quarterly Progress Reports. The report and its supplement wouldcover the following aspects:

(a) General Review. This section would cover matters affectingthe project such as Government policies, staff, legal andadministrative acts, weather conditions, financial andeconomic matters.

(c) Training. Progress of training ARDC, LDB and CB staff.

(d) Status of Project's Loan Application: Number of schemessanctioned and ARDC commitment during the quarter and cumula-tive, by State and by category (minor irrigation, diversifiedlending).

(e) Project Disbursements

(i) ARDC disbursements (Rs M) by category of farmers(small, other) and by State, during the quarter andcumulative;

(ii) analysis of disbursements against IDA credit (in US$ M)by category of lending (minor irrigation, diversified)compared with appraisal estimates, explanation of seriousdeviations from plan; and

(iii) up-dated disbursement projections to end of project.156

ANNEX 8Page 7

(f) Physical Achievements (to be included semi-annually in thereport):

(i) number of units financed during the six months and cumula-tive from beginning of project; and

(ii) number of units completed during the six months and cumula-tive from beginning of project.

(g) Monitoring and Evaluation

(i) number of follow-up studies for which reports werereceived and the number of farmers interviewed in thesestudies, during the quarter and cumulative, by Stateand by category of investment; narrative and statisticalsummary of main findings, especially percentage distri-bution of beneficiaries by income category;

(ii) number of end-of-scheme reports prepared during thequarter and cumulative and a summary of the main findings;

(iii) progress with evaluation studies and summary findings ofstudies completed during the quarter;

(iv) progress of work of Evaluation Task Unit; establishmentof CCAS; and

(h) A list of participating banks would be incorporated in theSeptember 30, 1977 quarterly report, thereafter, onlydeletions and additions, if any, would be reported.

17. Annual Progress Report. The report and its IDA supplement wouldprovide the following information:

(a) ARDC annual balance sheet, profit and loss statements,auditor's report to the Board, together with projectedbudgets, financial estimates and memoir of ARDC activ-ities during the fiscal year.

(b) Participating banks' annual balance sheets, profit andloss statements, auditor's reports to the Boards withspecific reference to accounts and reports on projectactivities.

(c) Overdues in the IDA Supported Program. Demand and over-dues in Rs M, and in number of beneficiaries, percentageof overdues, and percentage distribution of overduesaccording to the number of years by State and bank.

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ANNEX 8Page 8

18. Project Completion Report (PCR). A PCR would be prepared by ARDC

and sent to IDA no later than three months after the end of disbursements

under the project. Guidelines would be provided by IDA.

March 1977

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INDIA


On-going Agricultural Surveys

1. A cost efficient evaluation system suitable to ARDC would requiremaximum utilization of on-going surveys and studies in each State. A briefreview of the type of surveys which could be utilized for this purpose isprovided below.

2. A potentially important source of continuous cost-benefit data onthe main crops is the GOI on-going Icomprehensive scheme for studying the costof cultivation of principal crops' which covers a sample of a several thousandfarms throughout India. Its main objective is to collect data for formulationof GOI price policies. Field work is conducted by agricultural universitieswhich use the cost accounting method, in which farmers are frequently contacted.Data processing is done by GOI. Although data collected cover all farmingactivities in the sample farms, analysis is limited to the crop investigated.Even then there is a long delay in publication of reports. Indepth and timelyanalysis of these studies could provide useful data on cost and benefits ofagricultural investments throughout India. There are similar surveys in a fewStates (e.g. West Bengal) which with minor amendments involving small increment-al costs could also provide useful information.

3. Annual agricultural production surveys are conducted in each Stateby the State Government. Their main purpose is to provide estimates of pro-duction and land use. With minor amendments and appropriate processing, theycould provide a considerable part of the data required for evaluation ofminor irrigation and horticulture investments. This could include, for ex-ample, analysis of yield by rainfed and irrigated crops (and further, by typeof irrigation) collection and analysis of data on the use of important inputs(e.g. seed, fertilizer, pesticide) and cropping patterns.

4. Universities in various States conduct case evaluation studies ofagricultural investments, and other studies which have relevance to invest-ment institutions. For example, in one university the head of the departmentof agricultural economics has conducted a cost benefits study of minor irri-gation, about which ARDC did not know. In another state, the reasons for over-dues were studied and a formula for projecting the probability that the bene-ficiary would default has been developed in one of the universities withoutthe knowledge of ARDC or the banks. With appropriate communications theresults of such studies could be utilized for operational purposes.

159


5. Some of the banks have established planning units; however, due tolack of coordination, each unit has to conduct its own studies in order toobtain planning parameters such as investment costs, yield per ha, fertilizerper ha. A coordination of effort could reduce costs and generate more re-liable data.

6. To sum up, although the situation with regard to agriculturalsurveys varies from State to State, it is generally characterized by thefollowing:

(i) there is a network of surveys which, with minor changes,could provide evaluation data on agricultural investments;

(ii) data collected are often not analyzed in sufficient depth;

(iii) there is a serious backlog in processing and reporting; and

(iv) lack of coordination and interchange of information.

ARDC and the banks should play a leading role in improving the situation ineach State as they are main interested parties. Good data are essentialfor realistic planning, as a result of which beneficiaries are likely torealize benefits planned and to repay their loans in time.

March 1977

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INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION

End-of-Scheme Reports

1. The main objective of the end-of-scheme reports would be to

summarize the experience with completed schemes in order to utilize itfor improvement of the design and supervision of new ones. The report

would include the following:

(a) Brief background and description of the scheme.

(b) Review of scheme initiation, preparation and appraisal,main changes introduced as a result of appraisal, the

main covenants, and analysis of the time gap between

submission, appraisal and sanction.

(c) Comparison of planned and actual results, including scheme

duration, disbursements, number of physical units financed,

and percentage of small farmers; discussion of the reasons

for deviations from appraisal estimates.

(d) Review of the primary bank's method of beneficiary selection,approval and supervision of the loan, and its recovery policies.

(e) Description of supervision and control by ARDC and the financing

institution, indicating the number and frequency of supervi-sions, percentage of beneficiaries visited, percentage of loansinspected, and the percentage of loans which were misutilizedspecifying the main categories of loan misutilization.

(f) Description of the main findings during ARDC supervisions, and

corrective actions undertaken by the financing institution.

(g) Review of the financing institution's compliance with ARDC

covenants.

(h) Review of implementation problems and the adequacy of supporting

services (contractors, equipment, electricity, short-term credit,extension, farm supplies, etc.).

(i) Conclusions and recommendations.

2. The report would be short (5-10 pages plus annexes) based on docu-ments from the scheme's file, reports on supervision studies and informationfrom the ARDC staff. It would be prepared by ARDC regional staff and would

not normally involve additional visits to the scheme area. 161


3. As the number of ARDC schemes completed every year would be largeit may not be feasible to prepare a report for each scheme. End-of-schemereports would, therefore, be prepared initially for a sample of about 30schemes which ended during the project period.

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ANNEX 9

INDIA


Financial Analysis

1. The project lending program would cover a wide range of investmentsthroughout India, which would be implemented through a large number (about1,000) of schemes, each normally dealing with one type of investment (minorirrigation, dairy, poultry, etc.). The financial viability of investmentswould vary from area to area due to differences in local conditions. It isappraised for each scheme by ARDC through representative investment models,and for each individual borrower by the lending bank, through a calculationof the incremental net income resulting from the investment.

2. Ten models were selected to illustrate financial viability oftypical investments. Constant end of 1976 farm gate prices of inputs andoutputs were used in the calculations and are shown in Annex 10. The as-sumptions made are shown in the footnotes to each Table.

March 1977

163

ANNEX 9Table 1

INDIA


Financial Analysis

Minor Irrigation Models: Cropping Patterns

Without Project With Project

Crop ha Crop ha

Model 1: Dugwell with Pumpset (Eastern), 1.2 ha

Paddy kh 1.0 *Paddy kh 1.0Maize kh 0.2 *Maize kh 0.2Gram ral/ 0.2 *Wheat ra o.4Barley ra 0.2 *Potato ra 0.2

*Gram ra 0.2*Summer paddy 0.2

Total 5 Total 2.2

Crop Intensity: 130% 180%

Model 2: Shallow Tubewells(Northern), 2.0 ha

Millet kh O.6 *Paddy kh O.4Maize kh 0.4 *Millet kh o.4Fodder kh 0.2 *Maize kh o.6Wheat ra O.8 *Wheat ra 0.8Gram ra 0.C4 *Gram ra 0.2

*Potato ra 0.2*Cotton 0.*4*Sugarcane 0.2

Total 2 .4 Total 3.2


Model 3: Pumpset (Western), 1.2 Ha

*Sorghum kh 1.0 *Sorghum kh o.6*Maize kh 0.2 *Maize kh 0.2*Wheat ra 0.2 *Wheat ra O.6

*Cotton 0.2*Sugarcane 0.2

Total 1; Total 1.8


Model 4: Pumpset (Southern), 2.0 Ha

Paddy kh 1.2 *Paddy kh 2.0*Paddy kh C.8 *Groundnut ra 1.6*paaay ra o.4

Total 2. Total g


Model 5: Land Development (Western). 1.2 Ha)

Sorghum kh 1.0 * Sorghum kh o.6Maize kh 0.2 * Maize kh 0.2

*Wheat ra O.6* Cotton 0.2*Sugarcane 0.2

Total 1.2 Total 1.8


kh - Kharif; ra - Rabi. * Irrigated. 164

Source: ARDC.

March 29, 1977

ANNEX 9

Table 2

INDIA


Financial Analysis

Minor Irrigation Models: Crop Budgets for One Ha

Output 1/Crop Cash Inputs-

Yield (ton) Value (Rs) (Rs)

RAINFED: Paddy 2-/ 1.2 1,320 290Paddy S 1.1 1,210 300Wheat N 0°7 980 270Barley E 0.5 600 170Sorghum W 0.5 600 200Millet N 0.7 770 190Maize N 1.0 1,000 290Maize E o.8 800 240Maize W 0.7 700 180Gram N 0.5 1,000 190Gram E o.6 1,200 190Fodder N 1.0 740 230

IRRIGATED: Paddy N 1.9 2,090 740Paddy E 2.2 2,420 790Paddy S 2.0 2,200 780Suimmer Paddy E 2.4 2,640 810Wheat N 2.0 2,800 950Wheat E 1.6 2,240 860Wheat W 1.8 2,520 890Maize N 1.8 1,800 530Maize E 1.8 1,800 580Maize W 1.7 1,700 530Sorghum W. 1.5 1,800 560Millet N 1,2 1,320 500Gram N 1.0 2,000 590Gram E 1.2 2,400 650Groundnuts S 1.7 2,720 1,030Cotton N 1.0 3,600 1,000Cotton W o.8 2,880 1,160Potatoes N 15.0 7,500 3,340Potatoes E 15.0 7,500 3,310Sugarcane N 50.0 6,ooo 2,970Sugarcane W 65.0 7,800 4,080

1/ Seed, fertilizer, manure, pesticide, hired labor, estimated at 1/3 oflabor requirement, and interest on working capital estimated at 12%on 50% of inputs.

2/ E - Eastern region; S - Southern region; N - Northern region;W - Western region.

165

Source: Based on ARDC.

April 13, 1977

ANNEX 9Table 3

INDIA


Financial Analysis

Minor Irrigation Models: Income Statement-/(Rs)

Without Project With Project Increment

Model 1: Dugwell and Pumpset - 1.2 ha

Gross IncomeCrops 1,840 6,180 4,340

Sale of Water - l,23o_1 1,230

Total 1,840 7,410 5.570

Operating CostsCrops 410 2,200 1,790Pump - 630 630

Bullocks 300 600 300

Total 710 3,430 2,720

Operating Income 1,130 3,980 2,850

Model 2: Shallow Tubewell - 2.0 Ha

Gross IncomeCrops 2,190 9,220 7,030Sale of Water - 8403/ 840

Total 2,190 10,060 7,870

Operating CostsCrops 570 3,350 2,780Pump - 840 840


Total 870 4,790 3,920


Model 3: Pumpset 1.2 Ma

Gross IncomeCrops 2,640 5,070 2,430Sale of Water - 1 2304/ 1,230

Total 2,640 6,300 3,660

Operatin CoatsCrops 840 2,020 1,lD,0Pump - 630 630Bullocks 300 600 300

Total 1,140 3,250 2,110


Model 4: Pumpset 2.0 Ha

Gross IncomeCrops 4,090 8,750 4,660

Operating CostsCrops 1,300 3,210 1,910

Pumpck 740 740Bullocks 300 600 300

Total 1,600 4,550 2,950

Operating Incoe2,490 4,200 1,710

Model 5: Land Developsent 1.2 ha

Gross IncomeCrops 740 5,070 4,330

Operat ing Cos tsCrops 240 2,020 1,760


Total 490 2,620 2,130

Operating Income 250 2,450 2,200

1/ Calculation of income and operating costs for crops based on Tables 1 and 2 of this Annex.

2/ 350 hrs. - Rs 3.50

3/ 200 hrs. = Rs 4.20

4/ 350 hrs. - Rs 3.50 166

March 28, 197T

INDIA

SZ=0 AaIW LUAL W086CM ADM DZVflOf COR WPORATION CaEDI? P1028C

Miser Orriaattle Model Cah P1lm Prot.stie.-

1 2 5 8 9 10O 11 12 13 14 15

Mo,del 1:, 2,sowa1sn429st

ToOler: Ponds Desarated 1/ ~~~860 1,710 2,280 2,850 2,850 2,850 2,850 2.850 2,850 2,050 2,850 2, 850 2,850 2,850 2,850Projeet 1,oa (95%) 9, 00-0BOrrOt,ee. Coetrtibtio- (5%) 500

Total Inflow 10,560 1,710 2,280 2,850 2,850 2,810 2,850 2,850 2,80850 2,50 2,50 2,950 2,850 2,850 2,855

Outflow: Isveote,t 2/ 9,500 - - - - - - - 2,500 - - - - - (130)Dobt Service: Curret 2/ 650 1,480 1,480 1,480 1,480 1,480 1,480 1,480 800 000 800 000 000 000 8000

Price lode,, 100 107 114 125 131 140 158 161 172 184 197 210 220 241 250Contstnt 1976 630 1.380 1L300 1,200 tJ130 1,060 990 920 470 450 410 380 260 550 210

Total Outflow 10,150 1,580 1,500 1,200 1,150 1,560 990 920 2,970 451 410 580 560 558 T!4Net Cool Plow: A--ue 220 250 900 1,650 1,72.0 1,790 1,860 1,950 (120) 2,420 2,440 2,470 2,490 2,520 2,670

Cueoltiv- 220 560 1,540 3,190 4,910 6,7900 0,560 10,490 10,570 12,790 15,251 17,70(1 20,190 22,710 25,580

Debt Service Coveage 4/ 1.4 1.2 1.0 2.4 2.5 2.7 2.9 2.1 6.1 6.6 7.0 7.2 7.9 0 6 9.2Fineoiel Rate of Rococo 267,

Model 2: Shallow Tuhowe1Ibfl: rondo Gee-eted 1,190 2,270 2,160 2,950 3,950 2,920 3,950 2,920 2,950 3,950 5,950 5,920 3,900 5,950 5,950

Project Lose (902.) 0,100

Oore..er Cootributloo (10%) 900 --- ;3 -Toe ToOow10190 2,370 3160 T,950 T,950 3,950 3,950 Y,950 390 3,50 3,950950 5 3,50 2,5 390

Outflow: Iloveutrt 5/ 9,000 - - - - - - - 3,500 - - . - - (200)Dolt Seeilee: Cu--et 4570 1,470 1,470 1,470 1,470 1,470 1,470 1,470 820 820 050 020 020 020 020Pcio Index 100 107 114 127 151 140 150 161 172 184 197 210 225 241 2550Conete-t 1976 570 1 370 1.290 1.200 1 120 1.050 980 910 480 49A0 420 400 360 340 320

Tota otflow 9,570 1,370 1,290 1,200 1,120 1,050 980 910 5,980 150 420 400 360 340 120

Ret C.ol Flow: An..oal 620 1,000 1,870 2,750 2,030 2,900 2,970 5,040 (30) 3,501 3,550 3.550 3,590 3.610 3,030Coomulti- 620 1,620 3,490 6,240 9,070 11,970 14,940 17,900 17,950 21,450 24,980 20,331 32,120 35,750 593560

Dolt Service C-vere 2.1 1.7 2.5 3.3 3.5 3.8 4.0 4.3 0.2 8.0 9.4 9.9 11.0 11 6 12 5Fi-inell Rate of Rocc 41%

Model 3: Poop-et (1.2 H.)inflow: Foods Go.er-ted 470 950 1,240 1,550 1,550 1,550 1,350 1,550

roject Loon (95%) 3,300Oorrowec Cootributiss (57,) 200

Toa Inlw3,970 930 1,240 1,550 1,550 1,550 1,050 1,550

Outflow: Ioveto-ot 7/ 3,500 - - - - - - 130o)Debt Serice: Corret 8/232 690 690 600 690 690 690 690

PuRee loden 100 107 114 123 131 140 150 161Cons.tant 1976 -230 640 610 560 530 490 460 42

Total Outflow 3,730 640 610 560 530 490 460 260

Set IC.h FLow: Annoal 240 290 6210 990 1.020 1,060 0,090 1,230C,neolti-e 240 530 1,160 2,150 3,170 4.230 5,520 6,570

Dolt Service Coverage ~~~~~2.0 1.3 2.0 2.8 2.9 3.2 3.4 3.6EcnilRote of Rococ 380%

Model 4: Ponpot (2.0 Hn)inflow: Funds Genertetd 510 1,030 1,370 1,700 1,710 1,710 1,710 1,710

ProJect Loon (90%.) 5,150B -rrwer Co-teibocion (10%.) 350

Total Inflow 4,010 1,030 1,370 1,710 1,710 1,710 1,710 1,710

Outflow: lu-et-ot 7/ 3,500 - - - - - - (130)Dolt lervto: Ourret 0/ 220 660 660 660 660 660 610 660

Price rodeo 100 107 114 123 131 140 150 161Cou-tot 1976 220 620 500 540 500o 470 4.40 410

loud1 lotflo 3,720 620 500 540 500 470 440 280

Net Cool Flow: Aomuj 290 410 790 1,170 1,210 1,240 1,270 1,430C:olative 290 700 1,490 2,660 5,070 5,010 6,560 7,015

Dolt Senten Covoroce 2.5 1.7 2.4 3.2 5.4 3.f 3.9 4.2Fincofl Rae R Rott r 43%

lufl-w rondo Goene-ted 660 1,320 1,760 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,250 2,200Prnjent loon (95%) 1,900

T Ste1 ower-n Conteibtino (5%) 100 -Tota bO 2,660 1,320 1,760 2,200 2,200 2,200 2,200 2,200 2,200 2,200 2,205 2,200 2,200 2,200 2,200

Outflow: levent-nt 2,000 - - - - - - - -Dolt Serice: C-rret, 13 0 0 0 00 400 400 400 - - - - -

Price loden 100 107 114 123 131 140 150 161 - - - - - -Cn...tant 1976 130 570 550 350 31 20 27 25 - - - - -

local Outflow 2,150 370 350 330 310 280 270 250 - - - - -

Sot Cash Flow: A-nua 550 950 1,410 1,870 1,090 1,920 1,930 1,950 2,200 2,200 2,200 2,200 2,200 2,200 2,200CuosletOe 0530 1,480 2,990 4,760 6,650 8,570 10,500 12,450 14,650 16,050 20,050 21,250 23,450 25,650 27,050

Dolt OS.-Ie. C-veoo 5.1 3.6 5.0 6.7 7.1 7.9 8.2 8.3Filoacill Rate ofPRococ one 50%

±i Jnatonrtngne sac,ioesoa prtn noe as a .pretage cf full dovelpoat i - trcaco iscco -easucd to he eso follows:yea I - 30%, year 2 - 60%., year 3 - 80%., from year 4 - 1007..

2/ Oopoec., -poovlsso, ..c...cries end iontallacicn Re 5,500, well Rs 6,000, total Re 9,500. Replacemet of poop in lear 0 - Rs 2,5002! On eer I interest ss1y on 2/3 of the loon; the p,rioeipa1 is aee,ttised at 10.57 a-nsal interes.t as fellers, actor (Re 5,500) On Y-oru 2-0; well (Rs 5,700) in Foot 2-154! Calnelated (io all wodels) from the net be..efit. atreo hinh equal epeacioS io- (funds Sge.er.und) ninun i-eto..nt c-t-5/ Icvotnt s..unists of Re 5,500 fee p-spset, Re 2,100 for podh.sceo atn.....lri and iseta1latlc-, end Re 5,400 for the tcla,nll.6/ to yea I istoreot only en 2/3 of the lean; the princJPal in a-tised at 10.57, annual interest asfeos R. 5,150 to yearn 2-8 and Rs 5,050 in years 2-152/ PwoV.et noot R. 5,500.0/ 1n yea I Interet ncly -n 2/3 nO the loon; the Principal is -oetised in yeses 2-8 at 10.57, annua interest.9/ In yea I iter..at only cc 2/3 of the Ic.-; the princiPal I.e aotiead in y-sr 2-8 at 10.50% annel foterest. - 162

Hiars 28, 1977

INDIA


Financial Analysis

Model 6: Coconut (without irrigation) 0.5 ha1

/(Rs)

----------------------------------- -- --------------------- Years -------------------------- ------------------- -------------------

1 2 3 4 5 6 7 8 9 10 11 12 13-25

I. INCOME STATEMENTIncome

Coconuts - - - - - 609 1,218 1,827 2,436 2,741 3,045 3,350 3,654Intercrops2/ 400 400 400 400 400 400 400 400 400 400 400 400 400

Total 400 400 400 400 400 1,009 1,618 2,227 2,836 3,141 3,445 3,750 4,054

Operating CostsFertilizer 565pesticides 70Wages3/ 187Miscellaneous 21Intercrops 80 80 80 80 80 80 80 ____ _______

Total 80 80 80 80 80 80 923 923 923 923 923 923 923

Operating Income 320 320 320 320 320 929 695 1,304 1,913 2,218 2,522 2,827 3,131Less Operating Income Without Project 160 160 160 160 160 160 160 160 160 160 160 160 160Incremental Operating Income 160 160 160 160 160 7 33 1,144 1,753 2,058 2,362 2,667 2,971

IT. CASH FLOWInflowFunds Generated 160 160 160 160 160 769 535 1,144 1,753 2,058 2,362 2,667 2,971Project Loan (95%) 798 357 554 707 707 801 - - - - - - -Borrower's Contribution (57) 42 19 29 37 37 - - -

Total Inflow 1,000 536 743 904 904 1,570 535 1,144 1,7 3 2,058 2,362 2,677 2,971

outflowInvestment 4

/ 840 376 583 744 744 843 - - - - - -Debt Service: Current5/ 44 108 158 227 305 388 926 926 926 926 926 926

Price Index 100 107 114 123 131 140 150 161 172 184 197 211Constant 1976 44 101 139 185 233 277 617 575 538 503 470 439

Total Outflow 884 477 722 929 977 1,120 617 575 538 503 470 439 -

Net Cash Flow:Annual 116 59 21 (25) (73) (450) (82) 569 1,215 1,555 1,892 2,228 2,971Cumulative 116 175 196 171 98 548 466 1,035 2,250 3,805 5,697 7,925 -

III. FINANCIAL INDICATORSDebt Service Coverage 3.6 1.6 1.2 0.9 0.7 2.8 0.9 2.0 3.3 4.1 5.0 6.1Financial Rate of Return_/ 307

1/ The model is based on data from Kerala Agricultural Development Project which was appraised in 1976.2/ Based on 0.4 ha of grau or equivalent.3/ Sired labour costed at Rs 8.00/day and Rs 6.5/day for men and women respectively.4/ Planting material, fertilizer, chemicals and wages for hired labour.

m 5/ In years 1-6 interest only; the principal is amortized in years 7-12 at 111 annual interest.6/ Calculated from the net benefit stream which eq:uals incremental operating income minus investment costs.

March 28, 1977

ANNEX 9Table 6

INDIA


Financial Analysis

Model 7: Dair (2 cross-bred cows)

-------------------- Years ---------------------

1 2 3 4 5

I. INCOME STATEMENTGross Income

Milk 2/ 3,390 6,780Manure-13 100 200

Total-3 3,490 6,980 6,980 6,980 6,980

Operating CostsGreen Fodder

4 / 360 720

Dry Fodder5 /6/ 260 530

Concentrates- 7 1,040 2,070Veterinary Services- 100 200

Insurance / 50 100

Miscellaneous(10%) 180 360 _

Total Operating Costs 1,990 3,980 3,980 3,980 3,980

Operating Income 1,500 3,000 3 9 000 3,000 3,000

II. CASH FLOWInflowFunds Generated 1,500 3,000 3,000 3,000 3,000

Project Loan (95%) 5,320

Borrowers' Contribution ( 5%) 280

Total Inflow 7,100 3,000 3,000 3,000 3,000

Out flow 9 _

Investment 11/ 5,60 - - - 1,100)1

Debt Service: Current- 290 1,710 1,710 1,710 1,710

Price Index 100 107 114 123 131

Constant 1976 290 1,600 1,500 1,390 1,300

Total Outflow 5,890 O 1,500 1,390 200

Net Cash Flow: Annual 1,210 1,400 1,500 1,610 2,800

Cumulative 1,210 2,610 4,110 5,720 8,520

III. FINANCIAL INDICATORSDebt Service Coverage 5.2 1.9 2.0 2.2 2.3

FRR 12/ Over 50%

1/ Number of lactation days for 2 cows: year 1 - 265, years 2-5 - 530; average

production per cow 8 liters/day @ Rs 1.60.2/ Year 1 - 20 carts, years 2-5 - 40 carts @ Rs 5.00.

3/ The value of calves is assumed to equal their maintenance costs; both are omitted

from calculation.4/ 18 tons @ Rs 40, based on 25 kg/day per animal; 9 tons in year 1.

5/ 4.4 tons @ Rs 120, based on 6 kg/day per animal; in year 1 50% of these rates.

6/ 2.3 tons @ Rs 900, based on 1 kg/day per animal throughout the year plus 3 kg/day

per animal during lactation; in year 1 50%.

7/ 4% of cost of animals.8/ 2% of cost of animals.9/ Two crossbred cows @ Rs 2,500, shed Rs 500, equipment Rs 100.

10/ Residual value of shed and equipment Rs 300, and sale value of wulled cows Rs 800.

11/ Year 1 interest only (on 50% of loan); the principal is amortized in years 2-8 at

11% annual interest.

12/ Calculated from the net benefits stream which equals operating income minus

investment costs.

March 28, 1977 169

AN1EX 9Table 7

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPNENT CORPORATION CREDIT PROJECT

Financial Analysis

Model 8: Poultry (1.000 layers)

IRs '000)

- - - - - - - - - - - - - - Yeers - - - - - - - - - - - - - - - --

1 2 3 4 5 6 7 8 9 10

I INCOME STATEMENTGross IncomeEggs 1/ 70.4Manure g 2.5

Sale of empty gunny bags 3/ 1.0Sale of culls 4/ 9.0

Total 82.9 82.9 82.9 82.9 82.9 82.9 o2.9 82.9 82.9

Operating CostsChicks 5/ 4.0Feed 6/ 51.0 40.0

Medication, vaccination 7/ 2.0 2.0

Water and electricity 8/ 2.0 2.0

Maintenance and repairs 9/ 0.9 0.9

Miscellaneous and overheads(10%) - 6.0 4.4

Total Operating Costs 65.59 65.9 65.9 6 .95 9Operating Income - 17.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0 33.6

II CASH FLOWInflowFunds generated - 17.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0 33.6

Project loan (90%) 54.0 - - -

Borrower's contribution (10%) 6.0 -Capitalized interest 10/ 3.0 - - - _ _ _ _ - -

Total Inflow 63.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0 33.6

Outflow 1/- - - 4C~ 3

Investment 14/ 60.0- - 4.0 _ o -- (20.0)-

Debt Service: Current- 3.0 12.1 12.1 12.1 12.1 12.1 12.1 12.1 -

Price Index 100 107 114 123 131 140 150 161

Constant 1976 3.0 11.3 10.6 9.8 9.2 8.6 8.1 7.6 -

Total Outflow 63.0 11.3 106T 9 9, 2 8 7 .2 _ (20.o)

Net Cash Flow: Annual - 5.7 6T. 7.2 7.8 8.h -*-9 9.4 17.0 536

Cumulative - 5.7 12.1 19.3 27.1 31.5 40.4 49.8 66.8 120.4

III. FINANCIAL INDICATORSDebt Service Coverage - 1.5 1.6 1.7 1.9 2.0 2.1 2.2

FRR 15/ 26%

1/ Based on 1,000 layers, 220 eggs per layer/year e Rs 0.32.2/ Rs 2.50 per layer per annum.3/ Rs 1 per layer per annum4/ Rs 9 per layer5/ 1,150 chicks one day old (assuming 15% mortality) @ Rs 3.50; no chicks in year 10

6/ 1,100 chicks @ 10 kg/6 months at Rs 1.0/kg; 1,000 layers @ 40kg at Rs 1.0/kg.In year 10 feed costs for layers only.

7/ Ha 2 per layer8/ Rs 2 per layer9/ 2% of investment in buildings and equiplment (Rs 45,000).10/ 11% on 50% of loan11/ Buildings Rs 41,000, equipment Rs 4,000, chicks Rs 4,000, feeding costs

of chicks Rs 11,000, total Rs 60,000.12/ Replacement of equipment13/ Residual value of buildings (50%)14/ The principal and capitalized interest are amortized in years 2-8 at

11% annual interest15/ Calculated from the net benefits stream which equals operating income

minus investment costs. 170

April 13, 1977

T.ble.4INDIA


Financial Analysis

Model 9: 11 m. Mechanized Fishing Vessel

(Rs '000)

… - - -- - - - - - Years…-- - - - - - - -

1 2 3 4 5 6 7 8 9-10 11 12-14 15

I. INCOME STATEMENT 2Production of fish 41.4- 103.6- 103.6 103.6 103.6 103.6 103.6 103.6 103.6 103.6 .103.6 103.6

Operating Costs 4Fuel and Lubricants 6.6- 16.6-/Maintenance of hull and engine 2.5k 6.3k/Gear Maintenance and Replacement 1.58- 60--Wages 6.2- 16 3-,Food 03/ 231Ice 0'.3- 1 0-Insurance 2.23, 5.5k'Port Dues 0.43/ 1.9-/Miscellaneous and Overheads (10%) 2.1 5.6

Total Operating Costs 22.8 61.5 61.5 61.5 61.5 61.5 61.5 61.5 61.5 61.5 61.5 61.5

Operating Income* 18.6 42.1 42.1 42.1 42,1 42.1 42.1 42.1 42.1 42.1 42.1 42.1

II. CASE FLOWInflowFunds Generated 18.6 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1Project Loan (87.5%) 123.0Borrower's Contribution (12.5%) 17.5

Total Inflow 159.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1

Investment 140.515/ - - - - - - - - 54.0/ - (34.84/Debt Service: Current-8/ 6.8 26.1 26.1 26.1 26.1 26.1 26.1 26.1 - - - -

Price Index 100 107 114 123 131 140 150 161Constant 1976 6.8 24.4 22.9 21.2 19.9 18.6 17.4 16.2 - - - _

Total Outflow 147.3 24.4 22.9 21.2 19.9 18.6 17.4 16.2 - 54.0 - (34.-)

Net Cash Flow:Annual 11.8 17.7 19.2 20.9 22.2 23.5 24.7 25.9 42.1 (11.9) 42.1 76.9Cumulative 11.8 29.5 48.7 69.6 91.8 115.3 140.0 165.9 250.1 238.2 322.4 399.3

III. FINANCIAL INDICATORSDebt Service Coverage 2.7 1.7 1.8 2.0 2.1 2.3 2.4 2.6FRR 19/ 33%

1/ 4 months of fishing during year 1.2/ From year 2, annual landing per annum 60 tons of which 5 tons shrimp @ Rs 9,000 and

55 tons fish @ Rs 1,065. In year 1, 40% of the above.3/ Cost in year 1 40% of cost in year 2+.4/ Diesel 180 days, 10 hours/day, 6 liters/hour @ Rs 1.40; oil 108 liters (1% of diesel) @

Rs 10; grease 25 kg @ Rs 14.5/ 5% of capital cost of hull, engine and miscellaneous items (Rs 125,500).6/ 10% of capital cost.7/ 40% of capital cost.8/ Wages for four months.9/ Wages per month during 9 months season (Rs): skipper 450, driver 350, 3 deckhands

250 each; during 3 months monsoon 50% of the above rates.10/ Value Rs 2.50/day for each crew, 180 days.111 15 tons @ Rs 65.12/ Insurance 3.75% of investment, Rs 200 per annnum for crew.13/ 4 months @ Rs 100.14/ Port fees Rs 1,200, slipway charges Rs 700.15/ Rull Rs 70,000, Engine Rs 54,000, equipment Re 1,500, gear Rs 15,000, total Rs 140,500.16/ ReDlacement of engine.17/ Salvage values: hull and miscellaneous items 10%, engine 40%, gear 40%..'8/ Year 1 interest only (on 50% of loan); the principal is smortized in years 2-8 at 11%

annual interest.19/ Calculated from the net benefits stream which equals operating income minus investment costs.

5/ It is assumed that the beneficiary, being a cooperative member, is exempted from income tax.

March 28, 1977 171

ANNEX 9Table 9

INDIA


Financial Analysis

Model 10: Mechanized Canoe'(Rs '000)

-_…______________________--- Years ------- …----------------

1 2 3 4 5 6 7 8 9 10

I. INCOME STATEMEXT

Production of Fish I/ 22.5 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25-0 25.0

Operating Costs

Fuel and lubricants-/ 2.2Maintenance of boat-4/ 0.5Maintenance of motor- 0.5Gear maintenance and replacement- 3.7wagesa/ 7.2Food7/ 8/ 1.5Miscellaneous- 0 &

Total Operating costs 16.4 16.4 16.4 16.4 16.4 16.4 16.4 16.4 16.4 16.4

Operating Income 6.1 8.6 8.6 8.6 8.6 8.6 8.6 8.6 8.6 8.6

II. CASH FLOW

Inflow

Funds Generated 6.1 8.6 8.6 8.6 8.6 8.6 8.6 8.6 8.6 8.6Project Loan (92.5%) 29.0Borrower's Contribution (7.5%) 2.4 _ _

Total Inflow 37.5 8.6 8.6 8.6 8.6 8.6 8.6 8.6 8.6 8.6

Outflow

Investment-/ 31.4 - - - - 5.610/- - - (8-7) -/Debt Service: Currentl2J 3.2 6.1 6.1 6.1 6.1 6.1 6.1 6.1 - -

Price Index 100 107 114 123 131 140 150 161Constant 1976 3.2 5.7 5.4 5.0 4.7 4.4 4.1 3.8 - -

Total Outflow 34.6 5.7 5.4 5.0 4.7 10.0 4.1 3.8 - (8.7)

Net Cash Flow: Annual 2.9 2.9 3.2 3.6 3.9 (1.4) 4.5 4.8 8.6 17.3Cumulative 2.9 5.8 9.0 12.6 16.5 15.1 19.6 24.4 33.0 50.3

III. FINANCIAL INDICATORS

Debt Service Coverage 1.9 1.5 1.6 1.7 1.8 2.0 2.1 2.3FRP1 3/ 30%

* Based on data from Gujarat Fisheries Project which was appraised in 1976.

1/ From year 2, 16 ton fish; 20% Cl, 20% C2, 10% C3, 50% C4; price per ton Rs 3,330, 2,470, 1,050 and 480for Cl, C2, C3 and C4 respectively, average price Rs 1,500/ton; 50 kg. lobsters @ Rs 20. In year 1,90% Of the value of catch in year 2+.

2/ 2 hrs. of operation per day, 200 days per year total 400 hrs. per annum; 35 hrs. on petrol at 2.5 l./hr.total 87.5 1. @ Rs 3.60; 365 hrs. on kerosene at 2.5 1./hr. total 912.5 1. @ Rs 1.25; Oil 65 1. @ Rs 10;grease 5 kg. @ Rs 14.

3/ 3% of capital cost.

4/ 9% of capital cost.

5/ 40% of basic cost.

6/ 3 crew: 1 at Rs 300/month, 2 at Rs 250/month, for 9 months.

7/ Includes fish consumed on boat and fish taken home; estimated value based on Rs 2.50/day for each crew, 200 days.

8/ 5% of operating costs.

9/ Canoe Rs 15,000, motor Rs 5,600, nets Rs 9,300, sail and equipment Rs 1,500, total Rs 31,400.

10/ Replacement of motor.

11/ Salvage value of canoe (33%) and nets (40%).

] Year 1 interest only; the principal is amortized in years 2-8 at 11% annual interest.

13/ Calculated from the net benefits stream which equals operating income minus investment costs.

April 13, 1977

172

ANNEX 9Table 10

INDIA


Financial Rate of Return Sensitivity Tests

( % )

Model FRR Investment Operating Costs Benefits+10% +15% +10% +15% -10% -15%

Dugwell and pumpset 26 23 22 23 22 20 17

Shallow Tubewell 41 36 34 36 34 31 27

Pumpset 1.2 ha 38 34 32 31 28 26 20

Pumpset 2.0 ha 43 38 36 34 29 28 20

Land Development Over 50 Over 50 Over 50 Over 50

Coconut 30 28 27 29 28 27 25

Dairy Over 50 Over 50 Over 50 45 41 30

Poultry 26 23 22 14 8 11 3

Mechanized Fishing Vessel 33 29 28 27 24 23 18

Mechanized Canoe 30 26 24 21 16 16 10

March 28, 1977

173

ANNEX 10Page I

INDIA


Economic Analysis

Production

1. The project's primary economic benefit would be an increase inagricultural production for domestic consumption and export. The projectwould complete some investments initiated earlier, mostly under ARDC I andthe State based agricultural credit projects, and initiate others that, dueto this project's short duration, would be completed after its end. Estimatesof the project's impact on production should, therefore, be regarded as indi-cators rather than precise figures. Incremental production estimates (paras7.01-7.02) are based on the following assumptions:

(a) Minor Irrigation and Land Development: The total areabrought under irrigation would be about 0.9 M ha. Theincrease in crop area resulting from increase in cropintensity is estimated at about 400,000 ha.

(b) Diversified Lending:

Investment Unit No. of Units

Plantation andHorticulture ha equivalent /a 20,000

Dairy 1 cow 60,000Poultry 50 birds 34,000Sheep 25 ewes 14,500Fishing vessel 460

/a Investment period in plantation/horticulture is 4-6years; as the project period is only 2 years, thenumber of ha equivalent was calculated by dividingthe total estimated investment in plantation/horticulture by the average investment per ha over4-6 years.

Economic Rate of Return

2. Economic rates of return were computed for the same models whichwere used for financial analysis (Annex 9). The main assumptions made arethe following:

174

ANNEX 10

Page 2

(a) Crop development patterns and physical coefficientsare the same as in the financial analysis.

(b) Prices of internationally traded inputs and outputs arebased on Bank projections for 1980, with adjustmentsfor transport, handling, processing and quality. Com-modities like eggs, milk and fish were priced at cur-rent farmgate price. Prices are listed in Table 3.

(c) Economic benefits from sale of water are based on thecomputed incremental economic benefits per hour ofpump operation.

(d) Current costs (financial analysis estimates) net ofduties and taxes are used for estimating investmentcosts.

(e) The investment in electric connections was added toinvestment costs in the minor irrigation models (ex-

cluding land development). The economic price ofelectricity was estimated at Rs 0.35 per kwh.

(f) The economic price of hired labor was assumed to equal thegoing wages. Given the high rates of underemploymentand unemployment, especially among small farmers who wouldbe the majority of the beneficiaries (over 50%), theeconomic price of family labor was shadow priced at 50%of hired labor rates; the sensitivity of the ERR to thisassumption was tested (assuming full hired labor ratesfor family labor) and found to be small.

(g) Foreign exchange was shadow priced at the rate of US$1 =

Rs 12 which is about 33% higher than the prevailing rateof about US$1 = Rs 9. The shadow exchange rate (SER)was derived from the average standard conversion factor(SCF) for India over the last five years which is esti-mated at 0.75.

2. Based on these assumptions, the economic rates of return wouldrange from 22% to over 50%, as shown below and in Table 1:

175

ANNEX 10Page 3

Model ERR (%)

Dugwell and pumpset 27Shallow tubewell 41Pumpset (1.2 ha) 35Pumpset (2.0 ha) 32Land development over 50Coconut 22Dairy 39Poultry 23Mechanized fishing vessel 39Mechanized canoe 34Tractors n.a. /1Weighted Average /2 about 32

/1 Economic aspects of tractors have been in-vestigated in Bank financed studies in Punjaband in Gujarat. Based on the Gujarat studythe PCR for Gujarat Agricultural Credit Proj-ect estimated the ERR of tractors at 16%.The results of both studies are, however,regarded inconclusive. An additionalinvestigation of the economics of tractorswill take place during 1978 in connectionwith the preparation of a PCR for PunjabAgricultural Credit Project.

/2 Excluding tractors.

3. Sensitivity analysis was carried out to examine the affect ofchanges in costs, benefits and SER on the rate of return. Results areshown in Table 2.

April 1977

176

ANNEX 10Table I

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CREDIT PROJECT

Economic Analysis

(Rs '000)

Model ------------------------------------------------ Yeerr --------------------------------------------------------------

1 2 3 4 5 6 7 8_ 9 10 11 12 13 14 15

1. Dugwell tnd PumpsetBenefits 2.4 4.7 6.3 7.9 .29 7L9 2.9 7L9 7,9 Li9 7.9 7 9 7.24 7.9 7,

Investment Costs 1/ 13.9 - - - - - - 2.5 - - - _ _ _ (1.7)Operating Costs 1.1 2.3 3.0 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3e8 3 8 3.8 3.8 3.8Net Benefits (12.6) 2.4 3.3 4.1 4.1 4.1 4.1 1.6 4.1 4.1 4.1 4.1 4.1 4.1 5.8Economic Rate of Return 27%

2. Shallow TubewellBenefits 3.6 7.2 9.6 12.0 12.0 12.0. 12.0 12.0 12,0 12.0 2.0 1. 1 12 .0 12.0Investment Costs 1/ 13.4 - - - - - - 3.5 - - - - - - (1.7)

Operating Costs 1.8 3.7 4.9 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1Net Benefits (11.6) 3.5 74.7 5.9 5.9 5.9 3-9 T 5.9 5.9 5.9 5.9 5.9 5.9 7.6Economic Rate of Return 417.

3. PumPset - 1.2 haBenefits 2.9 3.7 5.0 6.2 6.2 6.2 6.2 6.2Investment Costs 1/ 7.9 - - - - - - (3.1)

operating Costs 0.9 1.9 2.5 3.1 .1 3i LNet Benefits (6.9) 1.8 2.5 3.1 3.1 3.1 3.1 6.2Economic Rate of Return 35%

4. Pumpset - 2.0 haBenefits 2.1 4.2 5.6 7.0 7.0 7.0 7.0 7.0Investment Costs 1/ 7.9 - - - - - (3.1)

Operating Costs 1.2 2.5 3.3 4.1 41 4J L.INet Benefits (7.0) 1.7 2.3 2.9 2.9 2.9 2.9 6.0Economic Rate of Return 32%

5. Land DevelopmentBenefits 2.3 4.5 6.0 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5Investment Costs 2.0 - - - -_

Operating Costs 0.9 1.8 2.4 3.G 1, 35 3'.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0Net Benefits (0.6) 2.7 3.6 4.5 4.5 4.3 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5Economic Rate of Return Over 507.

6. CoconutBenefits 0.4 0.4 0.4 0.4 0.4 0.9 1.4 1.9 2.4 2.7 3.0 3.2 3.5 3.5 3.5Investmeat Costs 1.0 0.6 0.8 1.0 1.0 T.D - - - - - - - - -

Operating Costs 0.1 0.1 0.1 0.1 0.1 0.1 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3Ret Benefits (0.7) (0.3) (0-5) (0.7) (0.7) (0.3) 0.1 0.6 1.1 1.4 1.7 1.9 2.2 2.2 2.2 2/Economic Rate of Return 2.%

7. DairyBenefits 3.5 7.0 7.0 7.0 7.0Investment Costs 5.8 - - - (1.1)operating Costs 2.3 4.7 4.7 4.7 4.7Net Benefits (4.6) 2.3 2.3 2.3 3.4Economic Rate of Return 3997

8. PoultryBenefits - 82.9 82.9 82.9 82.9 82.9 82 .9 82.9 82.9 82.9Investment Costs 59.5 - - - - 4.0 - - - (20.0)Operating Costs - 68.o 68.0 68.0 68.0 68.0 68.0 68.0 68.0 51.0Net Benefits (59.5) 14.9 14.9 14.9 14.9 14.9 14.9 14.9 14.9 51.9Economic Rate of Return 237.

9. Mechanized Fishing VesselBenefits 44.4 111 11. hIlInvestment Costs 132-.1 52.0 (32.3)Operating Costs ? 4 a...4 _3_ 66. 36 66.3 66.3 66.3 66.3 66.3 66.3 .3 66. .3Net Benefits (112.5) 44.8 44.8 44.8 44.8 44.8 44.8 44.8 44.8 44.8 (7.2) 44.8 44.8 44.8 77.1Economic Rate of Return 397%

10. Mechanized CsaoeBenefits L2I. I 22 25.7 25. 72. 25.7 25,7 25.7 25.7 25.7Investment Costs 29.4 - - - - 4.8 - - - (9.0)

Operating Costs 17.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0Net Benefits (23.2) 8.7 8.7 8.7 8.7 3.9 8.7 8.7 8.7 17.7Economic Rate of Return 347.

1/ Include investment in electric connection.

2/ Years 15-25.

April 19, 1977 177

ANNEX 10Table 2

INDIA


Economic Rate of Return Sensitivity Tests

(%)

Official -Best Investment Operating Costs Benefits Foreign Exchange

Yodel Estimate +10% +15% +10% +15% -10% -15% Rate

Dugwell and Pumpset 27 24 22 24 22 20 17 20

Shallow Tubewell 41 37 35 36 34 32 27 34

Pumpset 1.2 ha 35 31 29 30 28 26 22 24

Pumpset 2.0 ha 32 28 27 26 23 22 17 23

Land Development Over 50 Over 50 Over 50 Over 50 Over 50

Coconut 22 20 18 21 20 19 17 17

Dairy 39 32 30 24 17 17 7 45

Poultry 23 20 19 10 4 7 1 26

Mechanized FishingVessel 39 34 32 32 28 27 21 38

Mechanized Canoe 34 29 27 24 19 19 12 38

1/ US$ 1.00 = Rs 9.00, i.e. SCF = 1.0.

April 19, 1977

178

ANNEX 10Table 3

INDIA


Econoric Analysis

Financial and Economic Prices

Crops Financial Price Economic Price-(Rs/ton) (Rs/ton)

Paddy 1,100 1,900

Wheat 1,4oo 2,200

Sorghum 1,200 1,900

Maize 1,000 1,500

Barley 1,200 1,900

Millet 1,100 1,900

Gram 2,000 3,190

Fodder 74o 740

Groundnut (unshelled) 1,600 2,400

Sugarcane 120 250

Cotton 3,600 5,200

Potato 500 500

Coconut 700 600

Milk 160(per liter) 1.60(per liter)

Eggs 0.32(per unit) 0.32(per unit)

Fertilizer

N 4,500 5,800

P 4,000 5,100

K 1,500 2,100

1/ At a shadow exchange rate US$1.00 = Rs 12.00.

April 13, 1977

179

ANNEX 11

INDIA


Schedule of Estimated Disbursements-/

IDA Fiscal Year Disbursement During Cumulative Disbursementand Quarter Quarter End of Quarter

------------------- US $ M ------------------

1978

September 30, 1977December 31, 1977 10.0 10.0March 31, 1978 20.0 30.0June 30, 1978 30.0 60.0

1979

September 30, 1978 15.0 75.0December 31, 1978 20.0 95.0March 31, 1979 25.0 120.0June 30, 1979 35.0 155.0

1980

September 30, 197>/ 25.0 180.0December 31, 1979- 20.0 200.0

l Estimated date of effectiveness: August 31, 19772/ Estimated closing date: December 31, 1979

180

ANNEX 12Table 1

INDIA


Estimated Project Lending Program

(Rs M)

FY 78 FY 79 Total

ARDC loans/debentures to participating banks 2,600 2,850 5,450

Less program financed exclusively by ARDCL1/ 1,110

Balance ARDC program after deductions 4,340

ARDC commitment of IDA funds for on-going IDAprojects 1,055

Balance of program eligible to be financedby IDA 3,285

IDA contribution 1,791

IDA contribution in US$ million 199

IDA contribution as percentage of eligible program 55

1/ Mainly energization of pumpsets, tractors, forestry, markets and storage.

April 20, 1977

181

INDIA

SECOND AGRICULTURAL REFIN6NCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

ARDC Total Estimated Disbor.eents 1977/78 nd 1978/79(R. M)

Minor Land Far plUntstion/ Poultry/ Dairy Storaga/Irrigation Developrent Mechani-tion_ Hortirlt-re Sheep-Breeding Fisheries Develop=ent Harket Yards Others Total 7.

Stnte 77/78 78/79 77/78 78/79 77/78 78/79 77/78 78/79 77/78 78/79 77/78 78/78 77/78 78/79 77/78 78/79 77/78 78/79 77/78 78/79

Assao / 28.0 41.5 0.5 1.0 0.5 0.5 25.0 25.0 1.2 2.0 0.5 0.5 1.0 1.5 1.0 1.0 - _ 58.0 73.0Bihar~ 200.0 225,0 5.0 7.5 5.0 5.0 0.5 0.5 - - 1.0 1.0 1.0 1.0 48.5 35.0 _ _ 261.0 275.0Orics-1/ 139.0 175.0 5.0 7.5 1.0 2.0 2.0 2.0 - - 4.0 5.0 - - 1.0 1.0 _ _ 152.0 192.5West B.ngl- 71.0 80.0 1.0 1.0 5.0 5.0 2.0 2.0 0.5 0.5 1.0 1.0 1.0 1.5 3.0 3.0 2.5 3.0 87.0 97.0 22

2/Hicachal Pradesh 1.0 1.5 - _ _ - 20.0 10.0 0.5 0.5 - - 0.5 0.5 _ - _ - 22.0 12.5.Iaprm & lCa,hciriZ/ 0.5 0.5 0.5 0.5 0.5 0.5 5.0 5.0 0.5 0.50- 0.5 R. 0.5 0.5 0.5 8.8 8.5R.j.sthan_/ 6E.o 65.0 25.0 25.0 12.5 12.5 0.5 0.5 1.5 1.5 - 56.0 32.5 5.0 5.0 165.5 12.0 7

Andhr. Prdooh 145.0 150.0 15.0 15.0 5.0 5.0 2.0 2.0 2.5 2.5 2.5 2.5 5.0 5.0 1.0 1.0 _ _ 178.0 183.0eJat 50.0 50.0 2.5 2.5 10.0 10.0 - - - - 10.0 10.0 2.5 2.5 1.5 1.5 _ _ 76.5 76.5

uar.a 80.0 80 0 15.0 15.0 13.0 5.0 0.5 0.5 1.0 1.0 - - 3.0 3.0 2.5 2.5 _ 80.0 115.0 187.0terntohak 142.5 165.0 6.0 7.5 5.0 5.0 15.0 15.0 1.0 1.0 2.5 2.5 43.0 45.0 13.0 18.0 2.0 3.0 230.0 262.0Kerala 22.5 22.5 5.0 7.5 2.0 2.0 26.0 27.5 0.5 0.5 3.0 3.0 1.5 2.0 - - 1.0 1.0 61.5 66.0Madhya Pradesh 240.0 240.0 7.5 7.5 12.5 12.5 0.5 0.5 0.5 0.5 - - 33.0 30.0 2.0 2.0 2.5 2.5 298.5 295.5M.hare-htrs 202.5 222.0 52.0 80.0 20.0 22.0 5.0 5.0 2.5 4.0 2.5 4.0 25.0 30.0 10.0 10.0 - - 319.5 377.0Puojab 56.0 70.0 12.0 15,0 50.0 15.0 1.0 1.0 1.0 1.0 - - 3.0 2.5 4.0 5.0 - 2OL0 127.0 129.5Tamil Nad. 50.0 50.0 2.0 2.5 5.0 5.0 9.0 10.0 2.5 2.5 10.0 10.0 2.5 2.5 1,5 1.5 _ _ 82.5 84.0Utter Pr-desh 269.0 290.0 12.5 12.5 30.0 30.0 3.0 3.5 1.0 1.0 - - 5.0 5.0 2.0 2.0 - - 322.5 344.0Others 9.0 15.0 - - 2.5 2.5 10.5 12.5 6.0 6.5 4.0 5.0 3.0 3.0 0.5 0.5 - - 35.5 45.0

1,771.0 1,943.0 166.5 207.5 179.5 139.5 127.5 122.5 23.0 25.5 41.0 45.0 186.5 168.0 97.0 89.5 8.0 109.5 2,600.0 2,850.0~1_171 .0 -_ _ 166.5__---- 179.5 _ 127.5 23.0 41.0 186.5 97.0 8.0 2.6Q0.0

3,714.0 374.0 319.0 250.0 48.5 86.0 354.5 186.5 117.5 5.450.0-/

% 68 7 6 5 1 1 6 3 3 100 100

1/ Lea, developed north eastern states.2/ Other les developed statec.3/ This is the total projected ADC di.bhr-am-nt (inc.lding ARDC-II).

Septenber 30, 1976.

ANNEX 12Table 3

INDIA


Indicative Cost Estimates

(Rs M)

I. Minor Irrigation Local Foreign Total

Minor Irrigation

Dugwells l,548.o 211.0 1,759.0Pumpsets 417.0 57.0 474.0oShallow Tubewells 572.0 78.0 650.0Lift Irrigation 127.0 17.0 144.0Deep Tubewells 78.0 11.0 89.0Electrical Connettions 484.o 66.0 550.0Miscellaneous Works 1/ 120.0 16.0 136.o

Sub-total 3,346.o 456.o 3,802.0

Land Development

Land Leveling 116.0 7.0 123.0Land Reclamation 6.o - 6.0

Sub-total 122.0 7.0 129.0

Sub-total Minor Irrigation 3,468.0 463.0 3,931.0

II. Diversified Lending

Plantation and Horticulture 242.0 27.0 269.0Dairy 216.0 24.o 240.0Poultry and Sheep 130.0 14.0 144.0Fisheries 90.0 10.0 100.0Farm Mechanization 322.0 107.0 429.0Other 2/ 10)4.0 12.0 116.0

Sub-total Diversified Lending 1,104.0 194.0 1,298.0

III. Training 18.o - 18.0

Total Project Cost 4,590.0 657.0 5,247.0

1/ Sprinklers, water management works, lining of water courses, masonary wells,repairs to old wells, filter points, lifting devices.

2/ Markets, storage, agro-service centers, etc.

April 22, 1977183

-A~~~~~~~~~~~~~~~~~~~~~~~~~~~~~RD 12630

" § ._ _ k ;t.r' 80 INDIA FEBRUARY 1977

/> r,r k. Second Agricultural Refinance and Development Corporation Credit Project

GENERALIZED OCCURRENCE OF GROUNDWATER, RAINFALL AND EVAPORATIONAFGHANISTAN )

$ <-> Aereocenore come-hrfe inre L arge to moderate we I yields/ 2 : s . :: . ... / *= Al svlum of major river vrl eys and coaste areas

j' .J,iAMM,V ced KAS M/1/ g eMaderate well yields:5 ~ ~ ~ ~ ~ ~ ...1-SHI Canso iduled sedimeots Csandsmore, etc)

1- ,- !8 9 , ',' S u ' i. Pee r Fennsular hard roks (groranite, schist, etc.)

I Deccan ircp (basait and related voIcan cs)

f . I LL: /~ ....... .> * .Th n a lWviua and dune scnd af desert cres

(' , - .v [T 2!; ;. - , w i SEJ TITM Mountcaious wreas

v A cciRFir-elnin'. -- Anrua rainfall nm millimetersS PRA flESH - Annual evaporiatimon cenlinviers

~~~~ ~~~~~~~ ~~~~~~~ 0~~~~~ R D C Regiasal OfRises

PAKISTAN r - -- State ond Uion Territory boundcries

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S oInternctiona bounceries

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