World Bank Document

ReportNo 1520-IN SecondAgricultural Ref inanced Development CorporationCredit Project India Public Disclosure Authorized May 12, 1977V South Asia ProjectsDepartment

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Document of the World Bank

This document hasa restricteddistribution and may be usedby recipients only in the performanceof their otficialduties Its contents may not otherwise be disclosedwithout World Bankauthorization CURRENCY EQUIVALENTS

US$1.00 = Rs 9.00 1/

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS

ACD - Agricultural Credit Department (RBI) APC - Agriculture Projects Course ADB - Agricultural Development Branches ARDC - Agricultural Refinance and Development Corporation ARDC I - First Agricultural Refinance and Development Corporation Credit Project BTC - Bankers Training College CAB - College of Agricultural Banking, Poona CB - Commercial Banks CCAS - Coordination Committee for Agricultural Surveys and Studies CGWB - Central Groundwater Board DCCB - District Central Cooperative Banks FSS - Farmers' Service Societies GOI - Government of India HYV - High Yielding Varieties LDB - Land Development Banks (Generic term for all SLDB and PLDB whether operating on a federated or unitary system) NIBM - National Institute of Bank Management PCR - Project Completion Report PCS - Primary Cooperative Societies PLDB - Primary Land Development Banks PPA - Project Preparation and Appraisal Course RBI - Reserve Bank of India RRB - Regional Rural Banks SCB - State Cooperative Banks SFDA - Small Farmers Development Agencies SLDB - 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 fixed Pound Sterling rate. Since then, it has been fixed against a "basket" of currencies. As these currencies are floating, the US Dollar/Rupee exchange rate is subject to change. Conversions in this report have been made at US$1.00 to Rs 9.00, which was the short term average rate prevailing 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 ...... 1 A. The Agricultural Sector ...... 1 B. Agricultural Credit and Agricultural Credit Institutions ...... 3

III. PERFORMANCE OF BANK GROUP FINANCED AGRICULTURAL CREDIT PROJECTS IN INDIA ...... 8

IV. THE PROJECT ...... 11 A. General ...... 11 B. Detailed Features ...... 11

V. COST ESTIMATES AND FINANCING ...... 15 A. Cost Estimates ...... 15 B. Proposed Financing ...... 16 C. Procurement ...... 16 D. Disbursement ...... 17

VI. PROJECT ORGANIZATION AND LENDING ARRANGEMENTS ...... 17 A. Organization ...... 17 B. Lending Arrangements ...... 18 C. Accounts and Audit ...... 21 D. Lending to Small Farmers and in Lesser Developed States ...... 21 E. Monitoring, Evaluation and Reporting ...... 22

VII. PRODUCTION, MARKETING, PRICES, AND FINANCIAL RETURNS TO PROJECT BENEFICIARIES ...... 23

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

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

Schedule A - Groundwater Utilization - Districts Containing Intensively Developed and/or Potential Problem Areas Schedule B - Criteria for Spacing a-cxdDensity of Wells Schedule C - Project Lending Terms and Conditions Schedule D - Small Farmer Definitior£

This document has a restricteddistribution and may be used by recipients only in the performance of their official duties. Its content may not otherwise be disclosed without World Bank authorization. -2-

ANNEXES

I Bank Group Projects Financed through ARDC Table 1 - Summary of Bank Group Projects Financed through ARDC Table 2 - Summary of Results from ARDC Evaluation Studies Table 3 - Selected Financial and Economic Indicators from Gujarat Agricultural Credit Project (191-IN) PCR Table 4 - Preliminary Results from Farm Benefit Survey in Andhra Pradesh

2 Groundwater and Minor Irrigation Table 1 - Surface Water Resources - Estimated Runoff Table 2 - Estimated Groundwater Availability and Utilization - 1973/74 Table 3 - Net Area Irrigated by Sources - 1970/71 Table 4 - State Groundwater Organization Staffing - November, 1976 Table 5 - Irrigation Wells - Anticipated Achievement as at June 30, 1974 Table 6 - Villages Electrified as at March 31, 1974

3 Cooperative Banks, Cooperative Land Development Banks and Commercial Banks Appendix 1 - Summary of the Main Recommendations of the Committee on Integration of Cooperative Credit Institutions Appendix 2 - Summary of the Recommendations of the Talwar Committee Appendix 3 - Review of the Status of Agricultural Credit and Agricultural Credit Institutions on a State-by- State Basis Appendix 4 - Interest Rates in India Table 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 Corporation Table 1 - Average Borrowing and Lending Rates (1963/64 to 1975/76) Table 2 - Analysis of Interest Rate Structure Table 3 - Board of Directors Table 4 - Projected Staff Estimates - 1976/80 Table 5 - Organization Chart Table 6 - Schemes Under Consideration as at September 30, 1976 Table 7 - Purposewise Disbursements since Inception Table 8 - Local Resources Mobilization Table 9 - ARDC Condensed Statement of Income and Expenditure - 1971/72 - 1980/81 Table 10- ARDC Condensed Balance Sheets - 1971/72 - 1980/81 Table 11- ARDC Cash Flow - 1972/73 - 1980/81 Table 12- Growth since Inception -3-

ANNEXES (Cont'd)

5 Diversified Lending in Agriculture Table 1 - Index Numbers of Area, Productivity and Production - 1949/50 - 1975/76 Table 2 - Progress of Agricultural Programs - 1971/72 - 1975/76 Table 3 - Fertilizer Consumption in India Table 4 - Growth Rate of Production of 38 Major Crops - 1950/51 - 1975/76

6 Training Table 1 - Training of Senior and Middle Level Officers under ARDC I Table 2 - Projected Training of Senior and Middle Level Officers Table 3 - Estimated Training Cost - Project Period 1978 and 1979 (calendar)

7 Small Farmers Development Agencies

8 Monitoring, Evaluation and Reporting Appendix 1 - On-going Agricultural Surveys Appendix 2 - End-of-Scheme Reports

9 Financial Analysis Table 1 - Minor Irrigation Models: Cropping Patterns Table 2 - Minor Irrigation Models: Crop Budgets for one ha Table 3 - Minor Irrigation Models: Income Statement Table 4 - Minor Irrigation Models: Cash Flow Projections Table 5 - Model 6: Coconut (without irrigation) 0.5 ha Table 6 - Model 7: Dairy (2 cross-bred cows) Table 7 - Model 8: Poultry (1,000 layers) Table 8 - Model 9: 11 m. Mechanized Fishing Vessel Table 9 - Model 10: Mechanized Canoe Table 10- Financial Rate of Return Sensitivity Tests

10 Economic Analysis Table 1 - Economic Rates of Return Table 2 - Economic Rate of Return Sensitivity Tests Table 3 - Financial and Economic Prices

11 Schedule of IDA Estimated Disbursements

12 ARDC Lending Program Table 1 - Estimated Project Lending Program Table 2 - ARDC Total Estimated Disbursements - 1977/78 and 1978/79 Table 3 - Indicative Cost Estimates

MAP

IBRD 12630 Generalized Occurrence of Groundwater, Rainfall and Evaporation

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

SUMMARY AND CONCLUSIONS i. Since 1969, the Bank and IDA have financed 25 projects in India which involve, in one degree or another, the provision of agricultural credit. The Agricultural Refinance and Development Corporation (ARDC) has been a key agency in all these operations. Twelve projects were solely agricultural credit operations; of these, eleven supported credit programs in individual States and one was a general line of credit to ARDC (ARDC I). Through the twelve agricultural credit projects ARDC has had access to some US$429 M of Bank Group lending over the last eight years. Of this, it has utilized so far US$287 M (67%). ii. The institutional developments sponsored under the State oriented projects have strengthened ARDC, Land Development Banks (LDB), and State Groundwater Boards. These improvements were such that in 1975 IDA decided that a line of credit could be provided by IDA to ARDC in which field level appraisal, carried out by IDA in the case of the State projects, could be undertaken by ARDC itself. Credit 540-IN for US$75 M financed the ARDC I project and became effective in August 1975. Project costs totalled US$168.5 M. 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 and studies. Disbursements, as of December 31, 1976, amounted to US$31.2 M or 100% of appraisal estimates. Projections, based on ARDC commitments, indicate that Credit 540-IN will be fully disbursed by June 30, 1977 (six months ahead of the current Closing Date). iii. The perennial problem plaguing medium and long term credit objectives in India is excessive LDB overdues the level of which varies from State to State. In some States they persist at high levels, for example, about 59% in Maharashtra and Himachal Pradesh. Agreement was reached between ARDC and IDA during negotiations of ARDC I credit that a system of gearing the issuance of special debentures to recovery performance would be introduced. This was implemented by ARDC as of June 1975, and applied later by the Reserve Bank of India (RBI) to ordinary debentures. The gearing formula, the objective of which was to achieve a minimum standard level of recoveries, would also apply to the proposed project.

iv. Also under ARDC I, GOI agreed to establish a committee to examine the desirability of integrating the short term and long term activities of the cooperative credit structure. The Committee on Integration of Cooperative Institutions concluded that there is inadequate short term credit support for investment credit granted by LDB and that this results in investments being under-productive. Conversely, development credit has not always been forthcoming in areas where short term credit is being provided to farmers. The Committee has recommended integration, in a phased manner, of the two activities at all levels of the cooperative credit structure. - ii -

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 credit from US$75 M for ARDC I to US$200 M reflects the substantial increase in ARDC's projected lending program, which itself is based on past performance and on GOI National Commission on Agriculture's credit requirement estimates. The project lays special emphasis on meeting the medium and long term credit needs of small farmers, and of those States where agricultural development is lagging. The project would provide finance for the continuation of on-going programs of minor irrigation development and of other agricultural, livestock, and fisheries development activities planned for implementation during the two years beginning July 1977 and for which a need for refinancing by ARDC is anticipated. Minor irrigation loans would be made to individual farmers or groups of farmers. Investments would include open dugwells, pumpsets, and shallow tubewells. On the basis of experience under ARDC I, about 350,000 minor irrigation units would be installed under the Project, which would provide either primary or supplemental irrigation water to a total of about 0.9 M ha. Well construction would present few problems as, in addition to public sector corporations established for this purpose in each State, there are many private contractors skilled in and equipped for this work. Electric and diesel pumpset supplies are satisfactory and should pose no constraints to development. Adequate spare parts and good servicing facilities are available. To obtain maximum benefits from minor irrigation, some farmers would also be granted loans for on-farm development such as land leveling, bunding, field drainage, and realignment of field boundaries. Loans for deep tubewells, each of which would provide water sufficient for several farmers and command between 20 and 100 ha, would be made to groups of farmers, cooperatives and State Corporations. Many States have public sector corporations which own and operate such equipment and sell irrigation water to farmers. Similar arrangements would be employed for large capacity pumps for irrigation from rivers and other surface water sources. Minimum spacing between wells is essential to avoid over-exploitation of the resource and interference between individual water users. Guidelines for minimum spacing and permissible density of wells have been defined and would be enforced. Finance would not be provided for investments in areas defined in this project as restricted for further groundwater development unless the State Government concerned had either instituted controls acceptable to ARDC over sinking new wells in these areas, or had carried out studies satisfactory to ARDC that indicated that such areas could be removed from the list of restricted areas.

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

vii. The project would involve relatively small investments on individual farms throughout India. As in other ARDC operations financed by the Bank Group, project beneficiaries would be given freedom of choice in the procurement 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. - iii -

Yet most of the region enjoys moderate to heavy monsoon rains and large areas of relatively fertile soils, and there is a vast, mainly unexploited, surface and groundwater resource. ARDC has recognized the need to increase lending levels in these and other lesser developed States and has participated with IDA in review of their potentials. Under the project a minimum of 25% of ARDC refinancing is expected to be disbursed in such States which, in addition to lesser developed areas in the north eastern region States, include parts of Himachal Pradesh, Rajasthan, and Jammu and Kashmir. Lending in many of those States would be facilitated by on-going or proposed IDA financed projects directed at improving agriculture research, extension and other supporting agricultural institutions. ix. Present training arrangements for lending institutions are generally satisfactory. ARDC is aware that deficiencies have existed, and in some instances still exist in the training program - mainly the lack of training materials at the LDB training centers. The project would continue to expand training programs for: (i) senior and middle level staff of the main agricultural lending institutions; and (ii) LDB junior staff. Both activities have been initiated under the ARDC I credit and are proceeding satisfactorily. x. Project costs are estimated at Rs 5,247 M (US$583 M) of which about US$26 M are duties and taxes. The proposed IDA credit of US$200 M would be made to GOI on standard terms, and would finance about 34% of total project costs or about 36% of project costs net of duties and taxes. The credit would cover the foreign exchange costs of about US$73 M and about US$127 M (25%) of local costs. About 50% of total project costs would be provided by ARDC and GOI, 9% by participating banks, and 7% by borrowers. A Subsidiary Agreement, satisfactory to IDA, would be executed between GOI and ARDC, under which GOI would make: (i) US$1 M of the IDA proceeds available to ARDC, as a grant for staff training, and for a groundwater survey; and (ii) US$199 M available to ARDC, 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) depending upon the repayment period of ARDC refinance to participating banks. GOI would bear the foreign exchange risk. xi. Cost estimates are based on the ARDC indicative lending program for the period 1977/78 to 1978/79 which is drawn from estimates of agricultural investments 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 increase contingency at an annual rate of 7% in accordance with Bank estimates of future price movements in India. xii. The IDA disbursements would be made against ARDC certified statements of loans made by participating banks and refinanced by ARDC, and of expenditures on training, and the groundwater survey. Disbursements would be 55% of ARDC refinance for minor irrigation and diversified agricultural lending (excluding special categories such as tractors, energization of pumpsets, and forestry schemes which would be financed wholly from ARDC own resources), and 50% of the cost of training and survey. Final beneficiaries - iv - would be individual or groups of farmers and fishermen, cooperatives and public and private sector companies and corporations. Emphasis would be given to small farmers who would receive at least 50%, in terms of amount, of loans made 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 of project funds and contribute to the sound development of agricultural credit institutions throughout India. ARDC would refinance, by way of loans or purchase of special debentures, up to 90% of individual loans issued by participating LDB, commercial banks (CB) and State Cooperative Banks (SCB). Parti- cipating banks would compete for project business: there would be no specific allocations of funds between them. To be eligible to participate, LDB would have to meet the overdues criteria (para iii), and SCB would have to have a recovery rate of not less than 75% of demand. All CB, which are regulated by RBI, would be eligible. xiv. The ARDC lending program is implemented through a large number of area schemes. Under each scheme, credit is provided for one particular type of investment, for example, pumpsets or dairy cattle, within a compact area. Initiation and formulation of a scheme is normally by local banks in cooperation with State Government agencies. In lesser developed States, however, ARDC assists with scheme formulation and preparation. Schemes are submitted to ARDC for appraisal. Appraisal covers not only technical and financial feasibility, but also an assessment of the administrative and organizational capacity of supporting institutions, including extension, input supply and seasonal credit.

xv. ARDC performance under the ARDC I project has been consistently good as has been the case in the other Bank/IDA financed projects in which it has participated. ARDC has been scrupulous in its adherence to agreements and undertakings and has been regular in submitting required reports, documents and accounts.

xvi. The structure of interest rates in India is considered to be adequate. There is little inter-sectoral distortion: the differentials charged by institutions lending primarily to agriculture and those lending to industry are small. To industry the rate is between 11% and 12%. Commercial bank lending rates for agricultural purposes are about 13% when using their own funds. Under this project, participating banks, including commercial banks, would receive funds at minimum annual interest rates of 7.5% for minor irrigation and on-farm development, and 8% for diversified agricultural lending. Final beneficiaries would borrow at minimum rates of 10.5% for minor irrigation and on-farm development, and 11% for other agricultural purposes. Under the project, ARDC would ensure that interest rates charged on loans would be sufficient to enable ARDC and participating banks to: (i) cover all operating expenditures and charges, including taxes (if any), and interest payments on borrowings; and (ii) maintain adequate provisions for bad debts and adequate general reserves. While present interest rates are generally adequate to cover the costs of lending operations, most LDB would benefit from an increased "spread" to allow continued expansion of operations to - v - meet the needs of small farmers, and in the interest of long term financial viability. xvii. Reports from participating banks and field supervisions by ARDC, termed 'follow-up' studies, are the main source of information on the progress of ARDC refinanced schemes. During the project period several hundred schemes per 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 beneficiaries 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 in agricultural production for domestic consumption and export. At full development, the annual value of such increases is estimated at about US$367 M in terms of 1976 prices. Economic rates of return have been calculated, based on the experience gained under on-going ARDC schemes. They should be regarded as indicative since they are only a sample of what might be achieved. The overall economic return of the project would be about 32%. xix. Beyond the realization of substantial benefits arising out of on-farm investments, the project aims at the continued build-up of stronger institutions. Strengthening of the ARDC technical units and improvements in the Corporation's monitoring and evaluation systems should result in better preparation, appraisal and monitoring of schemes, thus reducing investment risks. Strengthening of LDB through intensified staff training would support this. Measures to better control overdues through tying the issuance of new debentures to recovery performance should lead to further reduction in LDB overdues and thus increase the availability of funds for investments. The number of project beneficiaries would be substantial; an estimated 1.0 M farmers would participate. Incremental annual employment generated by project investment is estimated at about 175 M man-days. Much of the additional labor would be supplied by unemployed or underemployed members of beneficiary families. However, a significant part would be provided by hired laborers. xx. The main risk in this type of project is inadequate appraisal and monitoring of schemes, leading to poor performance of some investments. ARDC experience shows that the risk is slight, and continuing institutional improvement through this project should further reduce it. xxi. The project is suitable for an IDA credit of US$200 M on standard terms. k INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

I. INTRODUCTION

1.01 In August 1975, an IDA credit (540-IN) for US$75 M, was made to India's Agricultural Refinance and Development Corporation (ARDC). That credit, 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 ahead of schedule. In July 1976, the Government of India (GOI) asked IDA for further financial assistance to ARDC.

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

1.03 This report is based on an application prepared by ARDC and on the findings of an appraisal mission which visited India in November 1976, consisting 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% per year and per capita income (US$115 in 1975) at about 1.4%. Agriculture is the most important sector. It employs about 70% of the population, contributes about 45% of GNP, and provides a major share of exports. A basic problem of the economy is the low growth rate in agricultural production, especially foodgrains, which has been only about 2.3% per annum over the last decade and about the same as the rate of population increase. Even in normal years, it is 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 of production.

2.02 Much progress has been made already in increasing the use of improved technology and expansion of the irrigated area. For example, over the last five years (1971/72-1975/76), the area planted in high yielding varieties (HYV) increased by about 70% to some 31 M ha. Fertilizer consumption, which grew rapidly between 1960/61-1973/74 from 294 to 2,839 thousand tons of nutrients, while declining during 1974/75 to 2,591 thousand tons as a - 2 - result of price increases, increased to 2,892 thousand tons in 1975/76 and is expected to resume its growth in the wake of GOI efforts to stimulate demand. Between 1971/72-1975/76, the gross irrigated area increased by about 18% to about 45 M ha, of which about 40% is served by groundna_er, much of it a 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 Fifth Plan, 1974/79, acknowledges that because of the limited scope for bringing new land into cultivation the greatest part of future increments in food production, and of foodgrains in particular, must come from increases in levels of land productivity. The Plan acknowledges also that a prerequisite for this 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 rainfall is inadequate for optimal produ.ction of the single rainfed crici Consequently, the Plan provides for major investments in irrigation both by the public sector, mostly in major surface irrigation schemes, and by the private sector in groundwater development though minor irrigation involving idugwells, pumpsets, and shallow tubewells, The project appraised in this -egort would provide support for this latter effort. The groundwater prcgram is particularly important in that it mobilizes private resources for development and generally results in a more efficient use of irrigation water than is usually the case in public sector surface schemes which generally involve heavy subsidies of both capital and operating costs. Also significant is that over the last 25 years the rate of growth in groundwater based on irrigation has far exceeded that of surface water schemes reflecting the more difficult institutional problems associated with public surface water schemes.

2.04 The area irrigated from groundwater resources increased from about 6.5 M ha in 1950, to 9.5 M ha in 1965 and to 17 M ha in 1975, when it compared with about 27 M ha water surface irrigation. The sharp rate 3f increase since 1965 has been partly a result of the introduction of high yielding crop varieties (HYV) to India and recognition by farmers and the authorities that obtaining the full potential from these needed an assured wa-_e- supply. It is estimated that, at full development, India's groundwater resources could irrigate over 35 M ha. There is, therefore, considerable sco7e for further development of this resource although there is wide variation between States in the extent to which it has so far been developed. States such as Gujarat, Haryana, Punjab, Rajasthan and Tamil Nadu have operated intensive groundwater development programs for many years and now have exploited at least 50% of their resources. On the other hand, in many of the poorer States such as West Bengal, Orissa and Bihar, resources are large and the extent of exploitation very low. In a review of the foodgrain production situation in the States of the eastern region 1/ which covered the preceding S_ates as well as the eastern part of Uttar Pradesh, and Assam, the Bank identified considerable scope for groundwater development and, in conjuction with GOI, the

1/ The Eastern Region Foodgrains Production Reviews (972-U; 1173-IN, 1175-IN). - 3 -

State Governments, and ARDC, has formulated plans for the accelerated development of groundwater which would be financed in part under the proposed project.

2.05 While expanded foodgrain production, and in its pursuit, the exploitation of groundwater resources, demand the highest priority, there is a growing need for other and more diversified agricultural development. Such diversification is important to: (i) better utilize India's diverse climatic and soil resources; (ii) produce a wider range of foods and raw materials in the interests of better nutritional standards, for example milk and fish, and of increased agricultural exports, such as coffee or cashew products; and (iii) improve income and employment prospects of the rural poor who either have no or very little land but who can participate in activities such as poultry and dairying. Diversification would be sponsored under the proposed project. This would include a wide range of investments in horticulture and tree crops - coconut, coffee, tea, mango, citrus; livestock - dairy, poultry, sheep; fisheries - marine and inland, as well as investments in storage facilities, 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%, for agriculture in India has been provided traditionally by private money lenders, usually at very high interest rates, and the remainder by cooperative and commercial banks. In recent years, there has been a significant growth in institutional credit and the relative importance of private money lenders has declined. Institutional short term credit for agriculture amounted to about Rs 11,840 M in 1976 and long and medium term institutional credit to about Rs 5,250 M.

2.07 Institutional credit for agriculture is provided by cooperative institutions and commercial banks. The cooperatives, organized on a State by 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 inputs as 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 15 years, for agricultural development. Since its organization over 70 years ago, the cooperative system has considerably expanded in some of the States. However, performance has been variable from State to State and from year to year. It has been relatively poor in the lesser developed States of the north eastern region. 2.08 In view of the remaining inadequacies of the cooperative structure, particularly in the north eastern States, GOI in recent years has sponsored a multi-agency approach to agricultural credit. Thus, where the cooperative credit structure is weak and limited in its agricultural lending (e.g. because of excessive overdues) the commercial banks (CB) have been induced to participate and encouraged to open more rural branches. As a consequence, and with the encouragement of IDA, major progress in agricultural lending has been recorded by the commercial banking structure in recent years. The Agricultural Refinance and Development Corporation (ARDC), refinanced some Rs 710 M for agricultural 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 administrative nature, vis-a-vis the cooperatives. These issues were examined by a committee (known as the Talwar Committee) headed by a former Chairman of the State Bank of India. The recommendations of this committee are summarized in Annex 3, Appendix 2. They have been implemented by about ten States and in these States CB enjoy the same privileges as cooperative banks in such matters as exemptions or relaxations in the payment of stamp duty, registration of charges, as well as priority in claims over charges created on security offered (para 2.18).

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

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

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

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

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

(iv) constraints on commercial bank lending - Kerala, Gujarat and other States where recommendations of the Talwar Committee are yet to be implemented (para 2.18); - 5 -

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

(vi) inadequate agricultural extension services which constrain the demand for agricultural credit - Assam, Bihar, MIadhya Pradesh, 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 administrative and legal issues involved, the pace of progress has varied from State to State. The rehabilitation of cooperative institutions usually involves better credit and financial discipline and the measures being taken in this regard are discussed in para 2.15. Training of bank personnel is being financed 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 requirements employed by LDB (para 2.12), and IDA is financing a project that includes updating land records in Orissa. Also, IDA is financing or is preparing projects that consist primarily of improving extension services in Assam, Bihar, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and West Bengal.

2.12 Under ARDC I, GOI agreed to establish a committee to examine the desirability of integrating the short term (SCB) and long term (LDB) activities of the cooperative credit structure. The Committee on Integration of the Cooperative Credit Institutions concluded that, generally, there is inadequate institutional short term credit support for investment credit granted by LDB and that this results in investments being underproductive. Conversely, development credit has not always been forthcoming in areas where short term credit is being provided to farmers. The Committee has recommended integration, in a phased manner, of the two activities at all levels of the cooperative credit structure. Provisions in the statutes of several LDB that can lend only against security of land were also identified by the Committee as preventing LDB from diversifying their lending operations into for example, financing schemes for dairy development and sheep breeding. The main recommendations of the Committee are summarized in Annex 3, Appendix 1. During negotiations it was agreed that GOI would continue its on-going discussions with State Governments with the objective of initiating implementation of the recommendations of the Committee in at least two States during the project 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 deadline for resolving all the problems affecting agricultural credit would be impos- sible to set and to enforce. However, during negotiations GOI and ARDC confirmed that they would continue their dialogue with individual States on problems affecting agricultural credit. The objective of such discussions would be to agree on the major problems and identify a specific action program and timetable designed to alleviate constraints over a reasonably short period. Progress would be recorded in ARDC progress reports. -6-

Land Development Banks (Annex 3)

2.14 During 1975/76, LDB accounted for about 21% of long and medium term institutional lending for agriculture in India, and for about 58% of ARDC refinancing volume. Farmers and State Governments are the main shareholders of the LDB, which are established under State laws, and are inspected and their borrowings regulated by the Reserve Bank of India (RBI). The LDB provide both long and medium term credit mostly against the security of land mortgages. The main sources of State Land Development Bank (SLDB) funds are: (i) ordinary debentures; and (ii) special debentures. Issue of ordinary debentures is sanctioned by RBI on the basis of each bank's need and financial viability, and are available for purchase by individuals, State Governments, CB, and other institutions, such as the Life Insurance Corporation of India. Ordinary debentures are guaranteed by the State Government of the issuing SLDB, are for a fixed term, usually between 5 and 15 years, and bear interest, currently about 6.5%. Special debentures are purchased by ARDC and the government of the concerned State, and are also guaranteed by the State Government. They differ, however, in being retired by annual installments in agreement with ARDC and the financing institutions. The proportion of total LDB financing through special debentures increased from 22% in 1971/72 to about 52% in 1974/75 and is expected to increase further.

2.15 The perennial problem of LDB is overdues 1/. Levels vary from State to State, ranging from nil % to 60% at SLDB level and from 3% to 42% at primary land development bank (PLDB) level. In some States, they persist at high levels, for example, about 59% in Maharashtra and Himachal Pradesh (Annex 3, Table 2). Agreement was reached between ARDC and IDA during negotiations of Credit No. 540-IN (ARDC I) that a formula of gearing the issuance of special debentures to recovery performance would be introduced. This was implemented by ARDC as of June 1975, and applied later by RBI to ordinary debentures. In accordance with the formula, LDB would be eligible to issue a percentage of debentures (ordinary and special) issued in previous years (annual average of last three years, or the previous year, whichever is the greatest) according to a set sliding scale of recoveries. Under the formula, an SLDB branch or PLDB would not be eligible for ARDC refinance unless it had a recovery rate of not less than 40%. Any SLDB branch or PLDB which had already achieved 75% recovery rate would not be refinanced by ARDC if its recovery rate fell below 75%, taking into account any State Government in- jection of equity paid in to reduce overdues (limited to 10%, maximum). At the same time, any SLDB branch or PLDB which had not achieved 75% would not be eligible for refinance if its recovery rate was less than tbiat of the previous 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 a percentage of "demand" (principal and interest falling due during the year, plus overdues from previous years). Given the greatly varying criteria used in different countries, it is not possible to compare India overdue performance with that elsewhere. FY76, there was an improvement in a number of States, for example, SLDB recoveries in West Bengal increased to 100% from 75% in FY75. There are signs that this improving trend is continuing. Most State Governments, appreciating the serious effect of high LDB overdues on future agricultural development, are actively assisting LDB to recover overdues; the results of their efforts should 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 a minimum standard level of 75% recovery; these arrangements would continue until October 31, 1978. After that date, the arrangements are that ARDC would not refinance any SLDB branch or PLDB if its collection was less than 75% of demand, of which up to a maximum of 10% could be by way of additional equity provided by the State Government. However, in some of the lesser developed States, where recovery progress has been slower than in other States, and where 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 and ARDC, provided that such modifications would not detract from achieving the objective of the criteria to strengthen the rural credit framework. An RBI/ ARDC committee has been formed to develop common norms for issuance of LDB debentures; this committee, which is operating satisfactorily, would recommend to IDA any proposed formula modifications. It was agreed during negotiations that the arrangements described above for the issuance of both ordinary and special debentures would apply throughout the duration of the project and that any modifications would be subject to IDA approval.

2.16 A further problem common to many LDB arises from the practice by State Governments of seconding State Government officers to head LDB. Often those officers do not have the necessary training and experience to run an LDB efficiently. Most staff at this level are seconded from cooperative divisions of State Governments and are subject to transfer at short notice. These staff changes, which occur frequently, have an adverse effect upon the efficiency of LDB. ARDC has requested State Governments to ensure that State staff on deputation remain with the LDB for at least three years after their training. During negotiations IDA discussed with GOI and ARDC the possibilities of LDB drawing up programs for permanent staffing as a condition of obtaining refinance from ARDC; those discussions would be followed up during project supervisions.

State Cooperative Banks (Annex 3)

2.17 The cooperative credit system is the major source of short term institutional 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 from RBI. SCB are eligible for ARDC refinancing but received less than 1% of total ARDC refinancing during 1975/76. As with LDB, the main problem of SCB 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 available to them, ARDC influence over SCB is small. However, to participate in ARDC schemes, including those to be financed under the proposed project SCB must have a recovery rate of not less than 75%. -8-

Commercial Banks 1/ (Annex 3)

2.18 The CB started lending in a modest way for agricultural purposes in 1969. During the last few years they made significant progress, providing about 33% of long and medium term direct institutional credit for agriculture in 1975/76, as well as some short term funds. Contributing to the increased activity of recent years have been participation in ARDC development schemes supported by provision of refinance by ARDC, and implementation by some States of recommendations of the Talwar Committee (para 2.08), that have improved the competitiveness of CB vis-a-vis LDB by removing some of the costs incurred by CB borrowers. Ten States have enacted legislation embodying the Talwar recommendations and draft bills are ready in several others. ARDC is encouraging early implementation of this legislation in all States, thus, CB now compete with both LDB and cooperative banks for available business and provide stimuli for improvement in the agricultural sector as a whole. A growing problem of CB has been overdues on their agricultural loans. However, CB have been better able to withstand arrears than LDB due to their diversified and remunerative lending in other sectors.

III. PERFORMANCE OF BANK GROUP FINANCED AGRICULTURAL CREDIT PROJECTS IN INDIA

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

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

1/ Nearly all commercial banks are scheduled. A banking institution can claim inclusion in the Schedule, provided: (i) it satisfies RBI that its affairs are not being conducted in a manner detrimental to the interests of its depositors; and (ii) its paid-up capital and reserves have an aggregate value of not less than Rs 0.5 million. - 9 - required the State Government either to establish a Groundwater Directorate or to strengthen an existing agency in the interest of ensuring proper use of groundwater and thereby of project funds provided for minor irrigation. General preconditions of Bank Group support for the State projects have included: (i) participation of a viable LDB with acceptable levels of staff and financial operations; (ii) satisfactory policies and procedures for lending; and (iii) adequate support services for participating farmers, especially agricultural extension, input procurement and distribution, marketing, and short term production credit. In all the State projects disbursements have tended to lag behind appraisal estimates because of lower than anticipated demand for loans for land development, and procurement problems in the case of farm mechanization. Conversely, disbursements for minor irrigation usually have been in advance of forecasts. Of the eight on-going project, six are expected to be fully disbursed by June 30, 1977, and the remaining two by December 31, 1978 and March 31, 1980 respectively.

3.03 ARDC I. The institutional developments sponsored under the State oriented projects have strengthened both ARDC and the LDB. These improvements were such that in 1975 GOI and IDA decided that a line of credit could be provided by IDA to ARDC in which field level appraisal, carried out by IDA in the case of the State projects, could be undertaken by ARDC itself. Credit 540-IN for US$75 M financed the ARDC I project, and became effective in August 1975. 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 agricultural lending, and US$1 M (1%) for training and studies. Disbursements, as at December 31, 1976, amounted to US$31.2 M, 100% of appraisal estimates. Pro- jections based on ARDC commitments indicate ARDC should fully disburse Credit 540-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 farmers, (see para 6.13 and Schedule D), compared with an appraisal target of 50%. Disbursement proportions of about 90% of total lending for minor irrigation and 7% for diversified agricultural development are in line with appraisal estimates. Estimates of individual investments financed under the project up to October 31, 1976, are shown in the following table: Dairy Dugwell & Fishing Cattle/ Tree Crop Dugwells Pumpset Tubewells Pumpsets Boats Sheep Plantings …------No. ……(ha)---

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

Other States - 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. - 10 -

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 of the training needs of junior level LDB staff. This was completed and the training program recommended would be financed under the proposed project. Importantly, the Committee on Integration of Cooperative Credit Institutions was established under the project. This Committee and its findings and recommendations are discussed in para 2.12.

3.04 ARDC performance under the ARDC I project has been consistently good as has been the case in the other Bank/IDA financed projects in which it has participated. The Corporation has been scrupulous in its adherence to agreements and undertakings and has been regular in submitting required reports, documents, and audited accounts. Full details of ARDC are in Annex 4.

Economic Impact of IDA Financed ARDC Projects

3.05 Investment in minor irrigation, under State based agricultural credit projects, began in 1970. However, as it takes farmers about three to four years to adjust cropping patterns and techniques to optimize returns from investments in irrigation it was 1974 before a meaningful assessment of benefits became possible. The first ex-post evaluation of minor irrigation schemes by IDA was in 1975, in the course of preparation of a Project Completion Report (PCR) for the first State agricultural credit project (Gujarat, 191-IN). Despite two severe drought years during the project implementation period resulting in the complete drying of several wells and reduced water availability in numerous others, estimates of financial rates of return (FRR) ranged from 12% to 30% for minor irrigation investments, with economic rates of return for the same investments averaging 28%. These returns were 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 irrigation investments elsewhere and these indicate FRR ranging between 29% and over 50%. In addition, a large number of beneficiaries have been interviewed during ARDC monitoring studies, which included a comparison of cropping patterns, inputs and outputs with planned ones. The findings indicate that most farmers benefit substantially from investments in minor irrigation and that further investments are justified. During 1970/76 the number of motorized dugwells and tubewells in India doubled, increasing in number by about 1.4 M units. Additional data is being gathered by ARDC and LDB and will 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 and preliminary results from one of them, Andhra Pradesh, are summarized in Annex 1, Table 4. - 11 -

IV. THE PROJECT

A. General

4.01 The project would provide finance for the continuation of on-going programs of minor irrigation development and of other agricultural, livestock, and fisheries development activities planned for implementation during the two years beginning July 1977, and for which a need for refinancing by ARDC is anticipated. Project funds would be channeled through ARDC which would refinance loans made by participating banks. Final beneficiaries would be individual or groups of farmers and fishermen, cooperatives, public and private sector companies, and corporations. The project would be a follow-up to ARDC I (para 3.03), and project activities would be a continuation of and similar to those financed under that project. As under ARDC I and the State oriented projects, participating banks would develop schemes under which a single activity, for example, shallow tubewells, fisheries, etc., would be promoted in a limited physical area in which all necessary support services would be provided to participants (para 6.07). As under ARDC I, minor irrigation development would predominate, and is estimated to utilize about 75% of project costs which are estimated at US$583 M. The project would also provide finance, US$1.95 M for the training of agricultural banking staff, and US$0.05 M for a sample agro-economic survey of tubewells and other groundwater structures in eastern Uttar Pradesh. As in ARDC I, emphasis would be given to small farmers who would receive at least 50%, in terms of amount, of loans made under the project and to States where agricultural development is lagging and where a minimum of 25% of project funds would be disbursed. Funds would not be allocated to specific States, but during negotiations ARDC agreed to continue in its lending operations to support and give priority to other Bank Group projects, particularly in the lesser developed States.

B. Detailed Features

Minor Irrigation

4.02 Minor irrigation loans would be made to individual farmers or groups of 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 constructed pumping units, such as Persian wheels, would also be financed. The numbers of each type of investment cannot be estimated accurately at this time and will depend on individual farmer's preferences and the groundwater environ- ment. On the basis of experience under ARDC I, however, it would appear that about 350,000 minor irrigation units would be installed that would provide either primary or supplemental irrigation water to a total of about 0.9 M ha. A considerable number of pumpsets are due for replacement during the next few years and in order to assess the magnitude of such replacements, - 12 -

ARDC would carry out a survey of probable pumpset replacement requirements over the next five years and the most appropriate means of financing them, such data would be available by December 31, 1978. This was agreed during negotiations. Well construction would present few problems as, in addition to public sector corporations established for this purpose in each State, there are many private contractors skilled in and equipped for this work. Electric and diesel pumpset supplies are satisfactory and should pose no constraints to development. Adequate spare parts and good servicing facilities are available. To obtain maximum benefits from minor and surface irrigation, some farmers would 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 to State Electricity Boards for spur lines and associated equipment needed to provide power to areas in which minor irrigation schemes are being developed. The average cost of step-down transformer, low voltage cable and 11 kv spur line is estimated at Rs 4,500 per pumpset. During negotiations it was agreed that 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 sufficient for several farmers and command between 20 and 100 ha would be made to groups of farmers, cooperatives and State Corporations. The costs of such an installation are about Rs 150,000. Many States have public sector corporations that own and operate such equipment and sell irrigation water to farmers. Similar arrangements would be employed for large capacity pumps for irrigation from rivers and other surface water sources.

4.05 Areas where the risk of over-exploitation of water resources is high have been delineated by the GOI Central Groundwater Board (CGWB) and are listed in Schedule A. Minimum spacing between wells is essential to avoid over-exploitation of the groundwater resources and interference between individual water users. Guidelines for minimum spacing and permissible density of wells are given in Schedule B. These criteria would be applied in the case of all minor irrigation financed under the project. These restrictions, however, are not a deterrent to farmers who can use their own resources to install wells since there is no legislation controlling groundwater exploitation. During negotiations it was agreed that GOI and ARDC would continue to encourage State Governments to regulate groundwater exploitation by enacting suitable legislation. Under the project, finance would not be provided for investments in the Schedule A areas unless the State Government concerned had either instituted controls acceptable to ARDC over sinking new wells in these areas, or had carried out studies satisfactory to ARDC that indicated that such areas could be rescheduled. Under the project, ARDC itself would carry out a study on a sample basis, under Terms of Reference acceptable to IDA, of the scheduled areas to refine its knowledge of the groundwater situation and the potential for minor irrigation investment; such study would be completed by December 31, 1978. This was agreed during negotiations. - 13 -

Diversified Lending

4.06 Diversified lending would include a range of horticultural, livestock and fisheries activities. Details of these are given in Annex 5. Many of these activities have been the subject of State oriented Bank Group financed projects under which technologies and lending techniques have been proven. Ex- amples are dairy development projects (Credit 482, 521 and 522-IN), the Drought Prone Areas Project (Credit 526-IN), and market development projects financed under Credits 294 and 378-IN. Under ARDC I, about 7% of the IDA credit was allotted for diversified lending. Under this project, the proportion would be increased to about 12% reflecting the increasing demand for finance for these activities. Dairy loans would cover the costs of dairy cattle and equipment needed by farmers wishing to participate in dairy enterprises that are so successful in India. A typical investment, costing about Rs 5,600 would cover the facilities for and the purchase of two dairy cows. Poultry loans would be made to groups as well as individuals. A typical group or cooperative investment would be a 1,000 layer battery unit costing about Rs 60,000. For small and marginal farmers many of whom would be participants in Small Farmers Development Agencies (SFDA) sponsored programs, a typical investment would be for a 50 layer unit costing about Rs 3,000. Fisheries loans would be mainly in the marine fisheries sector and be both for the purchase of mechanized vessels and traditional canoes. The typical mechanized vessel is an 11 m trawler cum gillnetter costing, including gear, about Rs 140,000. Loans to small, traditional fishermen would be for the purchase of canoes, average cost Rs 15,000, and outboard motors, average cost about Rs 5,600. Most tree crop loans would be for the rehabilitation of existing plantings. Typically, loan beneficiaries would make investments in soil preparation, planting materials, and provision of irrigation, where needed. The principal crops involved would be coconuts, tea, coffee, mangoes and citrus fruits. Investment cost is estimated to average Rs 5,000 per ha but this would vary according to the crop and the region, as would the loan repayment period, which would not, however, exceed fifteen years. Small, medium and large farmers would all be involved in this type of investment. Storage, Markets, Farm Equipment: There is an increasing need in India for storage to cope with the substantial increase in the production of foodgrain and other crops to which IDA is contributing through this and other on-going IDA agricultural credits. ARDC would provide refinance to CB against loans given by them mainly to private entrepreneurs for construction of godowns. Godowns would range in capacity from 2,500 to 5,000 tons and cost (including land) about Rs 400,000 and Rs 800,000 respectively. Under curcurrent arrangements, the Food Corporation of India (FCI) leases such godowns for a minimum period of 3 to 5 years using them for the storage of buffer stocks and for distribution of foodgrains to the public. It is essential that ARDC lending for storage be linked with GOI national storage plans for which Bank Group financial assistance is under consideration. Con- sequently, proposals for lending for storage would be referred to IDA before being sanctioned by ARDC. There is also some demand for ARDC refinancing of investments in regulated market yards. As yet, IDA has insufficient experience with the two on-going state market development projects. In particular the economic benefits are as yet uncertain, although financial returns are very high. Therefore, proposals for markets would also be referred to IDA for - 14 - approval before being sanctioned by ARDC. There is an increasing awareness of the advantages of small threshers and dryers, which would not cause labor displacement, to avoid spoilage and other losses at harvest time, particularly in those areas subject to adverse harvest weather conditions. Under the project, ARDC would encourage such investments by promoting them in the schemes for 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 that about 6,600 agricultural credit banking senior and middle level staff would require in-service training. About 25% of these will have received such training by the closing date of ARDC I (December 31, 1977) if current schedules are met. By December 31, 1979, estimated completion date of the proposed project, this should have risen to about 45%. This rate of progress is satisfactory given that banks have difficulties in releasing staff for training during busy periods. A study of LDB junior level staff training requirements conducted 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 9,000 staff in special categories such as technical and recovery officers should be given priority. All staff in the priority category are expected to have had this training by completion of ARDC I, and the remainder would receive it under the project. Details are in Annex 6. Present training arrangements and quality of training are generally satisfactory. ARDC is aware that deficiencies have existed, and in some instances, still exist in the training program - mainly the lack of training materials at the LDB training centers. ARDC is adequately staffed, however, to direct and monitor training programs and implement remedial measures when problems arise. The primary training center would continue to be the College of Agricultural Banking (CAB) at Poona. The LDB training centers, which would handle the bulk of the junior level training, would be required to meet ARDC standards for the curricula and for staff experience and quality. Details of the courses are in Annex 6. An assurance was obtained from ARDC at negotiations that it would carefully monitor the training programs and particularly the workshops for trainers, and revise training programs in the light of its evaluations. - 15 -

V. COST ESTIMATES AND FINANCING

A. Cost Estimates

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

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

I. Minor Irrigation Minor Irrigation 3,018.0 412.0 3,430.0 335.3 45.8 381.1 12 Land 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. Diversified Lending Plantation and Horticulture 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 10 Poultry and Sheep 117.0 13.0 130.0 13.0 1.4 14.4 10 Fisheries 81.0 9.0 90.0 9.0 1.0 10.0 10 Farm Mechanization 290.0 97.0 387.0 32.2 10.8 43.0 25 Other 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 before Contingencies 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 Project Cost 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 increase contingency at an annual rate of 7% in accordance with Bank estimates of future price movements in India. Cost estimates are based on the ARDC indicative lending program for the period 1977/78 to 1978/79 which is drawn from estimates of agricultural investments requiring ARDC refinance, prepared for the various States. ARDC has had long experience with investments of the type to be financed under the project and their costs; this is a two-year time slice of ARDC estimated five year program (excluding on-going IDA projects channelled through ARDC) and as with most agricultural credit projects, no allowance has been made for physical contingencies. Details of project costs are in Annex 12. - 16 -

B. Proposed Financing

5.02 Financing would be as follows:

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

Minor Irrigation 26.3 6 30.1 7 205.4 /a 47 175.0 40 436.8 100 Diversified Lending 11.6 8 24.7 17 83.9 /a 58 24.0 17 144.2 100 Training and 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 ARDC lb GOI

5.03 The proposed IDA credit of US$200 M would be made to GOI on standard terms, and would finance about 34% of total project costs or about 36% of project costs net of duties and taxes. The credit would cover the foreign exchange costs of about US$73 M and about US$127 M (25%) of local costs. About 50% of project costs would be provided by ARDC and GOI, 9% by participating banks, and 7% by borrowers. A Subsidiary Agreement, satisfactory to IDA, would be executed between GOI and ARDC, under which GOI would make: (i) US$1 M of the IDA proceeds available to ARDC, as a grant for LDB staff training and for a groundwater survey; and (ii) US$199 M available to ARDC, 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) depending upon the repayment period of ARDC refinance to participating banks. GOI would bear the foreign exchange risk. It would be a condition of credit effectiveness that GOI and ARDC had executed a Subsidiary Agreement satisfactory to IDA.

C. Procurement

5.04 The project would involve relatively small investments on individual farms throughout India. As in other ARDC operations financed by the Bank Group and as is usual in agricultural credit projects financed elsewhere, project beneficiaries would be given freedom of choice in the procurement of equipment, goods and services. Consequently, bulking for Interna- tional Competitive Bidding (ICB) would not be practicable, and ICB would not be used as a means of procurement. Normal commercial channels provide an adequate choice of locally manufactured equipment, good servicing facilities exist, and prices are competitive with those on world markets. - 17 -

D. Disbursement

5.05 The IDA disbursements would be made against ARDC certified statements of loans made by participating banks and refinanced by ARDC, and of expenditures on training. For ease of administration disbursement of the IDA credit would be made against: (i) 55% of ARDC refinance for minor irrigation and diversified agricultural lending (excluding tractors, energization of pumpsets, and forestry schemes which would be financed wholly from ARDC own resources); and (ii) 50% of the cost of training and survey. Documents would not be submitted to IDA for review, but would be retained by ARDC and be available for inspection by IDA during project supervision. A schedule of estimated 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 Parliament on July 1, 1963. Its main objective is to provide credit for agricultural investments by making long and medium term funds available mainly to LDB, SCB and CB to refinance approved agricultural schemes which are economically sound and located within a reasonably compact area. In its development role, ARDC helps formulate schemes, particularly in lesser developed States, and consequently is able to influence lending policies and procedures of agencies it assists. It was agreed during negotiations that GOI would advise IDA of any proposed amendments to the ARDC Act. ARDC would have primary responsibility for carrying out the project. Through its refinancing of participating banks, it would control the flow of project funds and further contribute to the sound development of agricultural credit institutions throughout India.

6.02 Organization and Management: The Managing Director (who is the chief executive) is assisted by some 300 professional staff of whom about 200 are located at head office in Bombay. The rest are in 15 regional offices (Map 12630) located in State capitals where they maintain contact with State Governments and financing institutions. The regional offices assist lending institutions in project preparation, implementation of ARDC policies and procedures, and scrutiny and appraisal of new schemes.

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

(i) Share Capital and Reserves: As of June 30, 1976, issued and paid-up capital was Rs 250 M and reserves stood at Rs 44 M. The ARDC has no bad debts or overdues, and the reserves are adequate given that most of its lending is guaranteed by State Governments. The principal shareholders are RBI 56%, LDB 18%, CB 16% and SCB 9%; - 18 -

(ii) Borrowings from GOI: As of June 30, 1976, borrowings from GOI, representing the rupee counterpart of disbursements made 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 variety of institutions, e.g. insurance companies, commercial banks, etc. During fiscal year 1976, bonds for an aggregate amount of Rs 385 M were issued, raising total market borrowings 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 National Agricultural Credit (Long Term Operations) Fund of RBI. Under this arrangement, borrowings reached Rs 600 M during 1975/76. Repayments on earlier loans were Rs 98 M, leaving a balance outstanding of Rs 1,384 M as of June 30, 1976; and (b) short term borrowings (less than 18 months); ARDC has a limit of Rs 150 M to accommodate temporary requirements; as of June 30, 1976, the outstanding balance was Rs 17 M.

6.04 Use of Funds. The major portion of ARDC past refinance has been for minor irrigation (75.2%). Other purposes of ARDC refinance include farm mechanization (10.8%), diversified agricultural purposes (8.2%), and land development (5.8%). Since its inception, ARDC has made significant contributions to increased production through financing of about 209,000 tubewells, 302,000 dugwells and 481,000 pumpsets. Land developed on irrigation projects and land improved under soil conservation schemes aggregate about 635,000 ha. Through its investments, ARDC has assisted in bringing about 2 M ha under multiple cropping. Other activities financed under ARDC include development of plantation and horticultural crops, poultry, sheep breeding, fisheries, dairy, and construction of storage facilities and market yards. Details are in 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% transferred to reserves (Rs 5.9 M) and taxes of Rs 30.9 M, this left a net profit for distribution 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 and debentures are projected to increase from Rs 5,500 M to Rs 17,000 M, paid up share 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 accounts for the fiscal year ended June 30, 1976, have been audited and have received an unqualified report.

B. Lending Arrangements

Participating Banks

6.06 ARDC would refinance, by way of loans or purchase of special debentures, up to 90% of individual loans issued by participating LDB, CB and SCB. - 19 -

Participating banks would compete for project business: there would be no specific allocations of funds between them. To be eligible to participate, LDB would have to meet the overdues criteria mentioned in para 2.15 and SCB would 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 implemented through a large number of area schemes. Under each scheme, credit is provided for one particular type of investment, for example, pumpsets or dairy cattle, within a compact area. Initiation and formulation of the scheme is normally by local banks in cooperation with State Government agencies. In lesser developed States, however, ARDC frequently assists with scheme formulation and preparation. Schemes are then submitted to ARDC for appraisal and approval of refinance. Appraisal covers not only technical and financial feasibility, but also an assessment of the administrative and organizational capacity of supporting institutions, including extension, input supply and seasonal credit. Where necessary, time-scheduled undertakings are obtained that services and institutions will be brought up to required standards. Technical appraisal is conducted by ARDC specialist staff supplemented by consultants of which ARDC maintains a large panel. Under the first line of credit, ARDC built up a satisfactory technical capacity for most groundwater development schemes which account for a large part of on lending operations. However, for appraisal and supervision of lift irrigation and deep tubewell schemes, ARDC needs additional technical expertise and an assurance was obtained from ARDC at negotiations that a person whose qualifications and experience are appropriate would be employed by ARDC as a permanent staff member by not later than August 31, 1977.

6.08 Following scheme appraisal, a report is prepared for approval by ARDC Board of Directors. However, if the total refinance requested amounts to Rs 5 M or less, the scheme may be approved by the Managing Director. The period of time between receipt of scheme application and approval depends on standards of preparation and type of investment but normally averages about 6 months. Following approval, the terms and conditions of refinance are formally communicated to participating banks. ARDC appraisal procedures and standards, which have gradually evolved and improved over the eight years in which it has been associated with the Bank Group, are satisfactory.

Lending Terms

6.09 Interest Rates. Generally, the structure of interest rates in India is considered to be adequate. There is little inter-sectoral distortion: the differentials charged by institutions lending primarily to agriculture and those lending to industry are small. In general, institutions lend to industry at between 11% and 12%, and commercial banks for agricultural purposes at about 13% when using their own funds. Under this project, participating banks, including commercial banks, would receive funds from ARDC at minimum annual interest rates of 7.5% for minor irrigation and on-farm development, and 8% for diversified agricultural lending. Final beneficiaries would borrow at minimum rates of 10.5% for minor irrigation and on-farm development, and 11% for other agricultural purposes. Under the project, ARDC would ensure that interest rates charged on loans would be sufficient to enable ARDC and participating banks to: - 20 -

(i) cover all operating expendituresand charges, including taxes (if any), and interest payments on borrowings; and (ii) maintain adequate provisions for bad debts and adequate general reserves. While interest rates are generally adequate to cover the costs of lending operations,most LDB would benefit from an increased "spread" to allow continued expansion of operations meeting the needs of small farmers and in the interest of long term financial viability. This would also enable direct recruitmentof permanent senior staff to replace staff now on secondment from the State Governments (para 2.16). Such a move would strengthen LDB. It was agreed during negotiationsthat ARDC, in conjunctionwith RBI, would carry out a study of interest spreads with particular reference to the needs of LDB; such study would be completed by March 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 accordancewith arrangementsbetween ARDC and participatingbanks. CB secure medium and long term loans by dis- cretionary first mortgages on land, chattel mortgages, guarantees,or other acceptable securities. In most States, LDB are required by law to obtain a first mortgage on land for all loans, and in most cases they also take a lien on any equipment purchased with loans. If LDB lend a farmer more than 60% of the value of his land, a State Government guarantee of the loan is required; this has been readily forthcomingwhen necessary.

6.11 Borrowers' Contribution to Investment Cost and Repayments. Under the project, the minimum contributionof a borrower with pre-developmentin- come between Rs 2,000 and Rs 3,500 (based on 1972 prices) would be 10% 1/ of investment costs. For farmers with pre-developmentincomes exceeding Rs 3,500, the minimum contributionwould be 10% 1/ of investment costs for minor irrigation and land development and 15% 2/ for other investments. For small farmers (defined in Schedule D), the contributionwould be 5% for all lending. Bor- rowers' contributionswould include the value of any family labor applied to the investment,as estimated by the lending bank. For loans from LDB, the down payment would include a mandatory 5% contributionto the share capital of 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 other farmers. For other agriculturallending, the repayment periods would con- form to the farmer's ability to repay, with a maximum of fifteen years. Where necessary, 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. - 21 -

C. Accounts and Audit

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

D. Lending to Small Farmers and in Lesser Developed States

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

1/ While such farmers are very poor, they are not always the poorest rural people. The latter are mostly landless laborers. They benefit indirectly from ARDC minor irrigation operations as a result of the improved on-farm employment opportunities resulting from intensification of land use. They also benefit directly from certain diversified lending operations. - 22 -

6.14 It is proposed that, under the project, ARDC refinancing of loans made to participants in SFDA and other capital grant schemes would be eligible for IDA finance provided IDA was able to reach agreement with GOI on the following points:

(i) use of a maximum of 2 ha of dry land or 1 ha of irrigated land 1/ (or the ARDC small farmer definition, whichever is lower) as the upper limit for allowing refinance of participants in SFDA under the Project: this would ensure that only genuinely small farmers refinanced by ARDC under the IDA 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, farmer eligibility criteria agreed with IDA would be observed, and suitable field supervision and auditing procedures would be followed: this would ensure that subsidy funds allocated within 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, comprising the States of Assam, Bihar, Orissa and West Bengal is an area where agricultural development lags. Yet most of the region enjoys moderate to heavy monsoon rains and large areas of relatively fertile soils, and there is a vast, mainly unexploited, surface and groundwater resource. ARDC has recognized the need to increase lending levels in these and other lesser developed States and has participated with IDA in review of their potentials. Under the project, a minimum of 25% of ARDC refinancing is expected to be disbursed in lesser developed regions which, in addition to lesser developed areas in the north eastern region States, include parts of Himachal Pradesh, Rajasthan and Jammu and Kashmir. Annex 12 shows ARDC plans for State by State lending. As noted in para 7.01, lending in many of those States would be facilitated by on-going or proposed IDA financed projects directed at improving agriculture research, extension and other supporting agricultural institutions.

E. Monitoring, Evaluation and Reporting

6.16 Monitoring. Reports from participating banks and field supervisions by 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 shown in Schedule D. The main difference between them is that the ARDC definition is based on a minimum income which is then converted into ha at District level and the SFDA definition relates to a fixed ha level. For most cropping patterns and in most States, the SFDA definition is considerably more restrictive than the ARDC definition, i.e. it is targeted at a lower farm size. Thus, the bulk of SFDA small farmers also qualify as small farmers under the ARDC definition. - 23 - progress of ARDC refinanced schemes. During the project period several hundred schemes per annum would be inspected by ARDC and several thousand beneficiaries visited. ARDC intends to improve the efficiency of its scheme supervision through: (i) clearer guidelines for the selection of schemes for supervision and 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 ARDC with better data on costs, benefits and financial viability at farm level of the main investments it refinances. ARDC plans to evaluate ten ARDC schemes and participate in evaluation of ten completed IDA financed agricultural credit projects during the project period. At the same time a major effort would be made to develop more suitable evaluation methodology through the establishment of an Evaluation Task Unit consisting of 3-4 senior staff who would dedicate their full time to that purpose. The possibility of coordinated evaluation efforts of different agencies, including ARDC, at the State level would be explored through the establishment, in each of an initial five States, of a Co- ordination Committee for Agricultural Surveys and Studies (CCAS), in which the State Government, ARDC, banks, and universities would participate. In order to implement this program ARDC would provide each of its regional offices with an agricultural economist.

6.18 Reporting. ARDC would send quarterly and annual progress reports to 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, location of study and methodology to be agreed by IDA; and (iv) provide all regional offices with an agricultural economist by December 31, 1977.

VII. PRODUCTION, MARKETING, PRICES, AND FINANCIAL RETURNS TO PROJECT BENEFICIARIES

Production

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

1/ IDA has financed the reorganization of extension and research services in Orissa and West Bengal, appraised such projects for Rajasthan, Madhya Pradesh and Assam, and is assisting in the preparation of similar projects for Uttar Pradesh and Bihar. - 24 - induced annual incremental production from minor irrigation at full development, is estimated as follows: (i) about 700,000 tons of foodgrains (about 0.6% of production in 1975/76); (ii) about 800,000 tons of potatoes and other vegetables; and (iii) sugarcane, groundnuts and fibercrops valued at about Rs 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 tree crops, for example - coconuts, coffee and tea, livestock - milk, eggs and wool, and fisheries - fish and shrimps. Part of this production, for example, coffee and shrimp, would be exported. The value of incremental output resulting from diversified project lending, at full development, is estimated 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 produce such as foodgrain, vegetables and livestock products, for which demand is good and expected to rise as a result of population increase. Export market prospects for items such as shrimp, sugar and coffee are good. Marketing difficulties are not anticipated as incremental output would amount to a small proportion of present production, would come from numerous and widely dispersed areas throughout India, and could easily be handled by existing marketing 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 projections of world prices. Details are in Annexes 9 and 10.

Financial Benefits

7.05 The financial viability of the principal categories of project investments have been tested through the analysis of ten representative models. The financial rates of return (FRR) and incremental benefits are summarized below: - 25 -

Annual Incremental Income After Debt Model Area (Size) Rs FRR Service (%) (Rs)

1. Dugwell and pumpset 1.2 ha 9,500 26 1,650 2. Shallow tubewell 2.0 ha 9,000 41 2,750 3. Pumpset (3 hp) 1.2 ha 3,500 38 990 4. Pumpset (3 hp) 2.0 ha 3,500 43 1,170 5. Land development 1.2 ha 2,000 over 50 1,870 6. Coconut 0.5 ha 4,100 30 1,500 7. Dairy 2 cows 5,600 over 50 1,410 8. Poultry 1,000 layers 60,000 26 5,700 9. Mechanized fishing vessel 11 m. 140,500 33 17,700 10. Mechanized canoe 9 m. 31,400 30 2,900

7.06 These rates of return are only illustrative, but they show that proposed project investments would be attractive to sub-borrowers and that demand for investment funds provided by ARDC is likely to remain strong. However, it must be recognized that as ARDC operations expand to reach smaller farmers, particularly in lesser developed areas, financial returns may not always be as attractive as indicated by these averages. In particular, effective extension and provision of modern inputs and improved water sharing among small farmers is often a prerequisite to profitable minor irrigation investment. Thus, continued expansion of sound ARDC lending operations is substantially dependent on the development of such complementary services promoted under a variety of GOI programs, often under the support of Bank Group projects.

VIII. ECONOMIC BENEFITS AND JUSTIFICATION

8.01 The project's primary economic benefits would be an increase in agricultural production for domestic consumption and export. At full development, by about 1984, the annual value of such increases is estimated at about US$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 investment models used in the financial analysis of the project, para 7.05. Based, as they are, on the experience gained under on-going ARDC schemes they can be regarded as indicative of the rates of return which would accrue. Results of the calculations which are summarized in the following table indicate that the overall economic return of the project would be about 32%. - 26 -

Economic Rate of Return Best Investment Operational Benefits Estimate + 10% Costs + 10% -10%

1. Dugwell and pumpset 27 24 24 20 2. Shallow tubewell 41 37 36 32 3. Pumpset (1.2 ha) 35 31 30 26 4. Pumpset (2.0 ha) 32 28 26 22 5. Land development over 50 over 50 over 50 over 50 6. Coconut 22 20 21 19 7. Dairy 39 32 24 17 8. Poultry 23 20 10 7 9. Mechanized fishing vessel 39 34 32 27 10. Mechanized canoe 34 29 24 19

8.03 Beyond the realization of substantial benefits arising out of productive on-farm investments, the project aims at the build-up of stronger institutions. Strengthening of the ARDC technical units and improvements in the Corporation's monitoring and evaluation systems should result in better preparation, appraisal and monitoring of schemes, thus reducing investment risks. Strengthening of LDB through intensified staff training would have a similar impact. Measures to better control overdues through tying the issuance of new debentures to recovery performance should lead to further reduction in LDB overdues and thus increase the availability of funds for investments and contribute to a more equitable distribution of productive assets in the countryside.

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

8.05 Project Risk. The main risk in this type of project is inadequate appraisal and monitoring of schemes and individual borrowers, leading to poor performance of some investments and borrowers. ARDC experience shows that this risk is slight, and continuing institutional improvement should further reduce it. The vagaries of weather are an omnipresent risk, but with about 75% of project investments planned for minor irrigation, the project by its ature is risk reducing. - 27 -

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 LDB debentures, and any modifications would be subject to IDA approval (para 2.15);

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

(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 of interest spreads with particular reference to the needs of LDB (para 6.09);

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

(g) ARDC would follow monitoring, evaluation and reporting procedures 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 to IDA, had been executed (para 5.03).

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

May 12, 1977 INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Groundwater Utilization

Districts Containing Intensively Developed and/or Potential Problem Areas

State District Tehsil/Taluk State District Tehsil/Taluk

Gujarat Ahmedabad Daues Haryana Hissar Barwala Viramgam Hansi-I Sirsa Banaskantha Deodar Jind Rajannd Deesa Dhanera Karnal Assandh Madlauda Junagadh Mangrol Missang Veraval Nilokheri Panipat Kutch Anjar Samalka Bachan Lakhpet Kurukshetra Gulha Mundra Ladwa Naliya Pundri Rapar Sahabad Thanesar Mehsana Mehsana Patan Mohindergarh Atalinangal Vijapur Bawal Khol Haryana Ambala Barara Khanina Jagadhari Narnaul Naraingarh Nangal-Chowdri Rewari > 0.

tbm I -a State District Tehsil/Taluk State District Tehsil

Bhiwani Bhadra Rohtak Bahadurgarh Bhiwani Beri Dadri I Jhajjar Dadri II Kharkhoder Dadri II Kalanaur Loharu Nahar Rohtak Gurgaon Balabhgarh Shalawas Gurgaon Hathin Sonepet Ganaur Nuh Rai Pataudi Sonipat Punhana Sohana Maharashtra Ahmednagar Akola Rahuri Karnataka Bangalore Bangalore south Kopargaon Devanahalli Sangamener Doddaballapur Hoskote Dhulia Dhulia Nandurbar Belgaum Attani Chikodi Nasik Chandur Gokak Kalwan Hukkeri Malegaon Raibagh Satana

Bellary Harpanahalli Sangli Khanapur Mallapur Miraj

Bijapur B. Bagewadi Orissa Ganjam Aska-Block Bijapur Indi Punjab Faridkot Nilsinghwala Jamkhandi Moga and southern Mudhol parts of Jagraon Sindgi d (D o 9 5D State District Tehsil/Taluk State District Tehsil/Taluk

Chitradurga Challakere Kapurthala West Entire district except Chitradurga 5 km. wide belt along Hiriyur river Beas Jagalur Molakalmuri Ludhiana Complete district except in the block Dharwar Mundargi along river Sutlej

Kolar Bagepalli Patiala Parts of Nabha and Bangarpet Sirhind Tehsil, Samana Chikkaballapur Chintamani Sangrur Complete district Gudibanda except in the southern Kolar part of Sangrur tehsil Malur and western part of Mulbagal Barnala tehsil Sidlaghatta Barmer Entire district except Mandya Mandya Siwana block Pandavapur Srirangapattana Ganganagar Excepting the eastern parts and areas Mysore Yelandur adjacent to canals

Raichur Koppal Jaisalmer Whole district excepting areas south of Tumkur Bavagada Jaisalmer Koratagere Madhugiri Jalore Entire district Sira Jodhpur Jodhpur-Nathaniaarea

Pali Entire district

t cn rr,D I-.> State District Tehsil/Taluk State District Tehsil/Taluk

Tamil Nadu Coimbatore Avinashi West Bengal Birbhum Bolpur Coimbatore Labhpur Palladam Mayureshwar Murarai North Arcot Arni Nalhati Polur Rampurhat Wandiwash Upper Nanur

Ramanadhapuram Arupukottai Burdwar' Kalna Sattur Katwa Srivalliputhur Hooghly Arambagh Salem Attur Balagarh Salem Ganghat Pursurah Tirunelveli Koilpatti Nanguneri Malda Kharba Ratna Uttar Pradesh Aligarh Areas around Aligarh; Iglas in Iglas Tehsil Murshidabad Bharatpur and Sansi in Hathras Burwan Tehsil Kandi Khargram Badaun Alapur in Datagani Tehsil and Kisrua Nadia Krishnagar-l in Badaun Tehsil

Bulandehahr Jewar and Rabupura in Khurja Tehsil

Meerut Baraut, Chhaprauli Kisanpur Baral and Daha in Baghpat Tehsil

Nidinagar and Pilkhua in Gaziabad Tehsil, Kharkhuda, Babugarh and Hapur in IV Hapur Tehsil, Bhawanipur 9 = and Jani-Khurd in M ff Meerut Tehsil 4-

Source: Central Groundwater Board Schedule B Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Criteria for Spacing and Density of Wells

Participating banks and State agencies shall determine, for each scheme submitted to ARDC involving groundwater development, permissible spacing and density of wells and anticipated water quality based upon local geologic and hydrologic conditions. Such determinations shall be reviewed by ARDC prior to sanction of any scheme. In the event any scheme proposes development exceeding the following guideline criteria, ARDC may sanction the scheme only after receipt and approval of additional detailed supporting data. ARDC shall maintain a record of all requests for relaxation of the following criteria, including the supporting data submitted and action taken,. 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

Dugwells Without pumpset /a 180 m 150 m 110 m 100 m With pumpset /b 250 m 200 m 150 m 100 m

Tubewells in Alluvium Shallow Tubewells /c 275 m 225 m 175 m 150 m Deep Tubewells /d 1,000 m 800 m 600 m 500 m

Tubewells in Sedimentary Rocks Medium 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 B Page 2

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

B. Well Density

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

33 Schedule C Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Agricultural Refinance and Development Corporation

Project Lending Terms and Conditions

The following lending terms and conditions would be used in implementing 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.

2. ARDC to Lending Banks

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

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

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

34 Schedule C Page 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 the cost of project investment may be charged;

(c) Farmer's contributions (including obligatory purchase of LDB shares, own labor, and other contributions in 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 predevelopment net return to family resources ranging from Rs 2,001 to Rs 3,500 based on 1972 prices, a minimum of 10% 1/ of the investment cost; and

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

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

(i) for normal lending:

(1) 7 years on loans for pumpsets, whether financed as separate loans or included in other minor irrigation loans; and

(2) 9 years on loans for minor irrigation and on farm development loans, other than pumpsets;

(ii) for lending to small farmers:

(1) 7 years on loans for pumpsets, whether financed as separate loans or included in 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.

Schedule C Page 3

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

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

(f) Technical standards, in particular criteria for spacing and density of wells as laid down in Schedule B to be observed. For lift irrigation schemes, a careful determination of water availability would be made. In evaluating water supply attention would be given to net depletion resulting from recent and future groundwater developments and the effect this would have on the base flow of the stream.

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

(h) If his cultivated area was significantly smaller than that which could be adequately irrigated by the tubewell concerned, the borrower would undertake to sell water surplus to his needs, or to hire out his pumpset, or to participate with other farmers in the joint investment and operation of the tubewell.

(i) Corporation or farmers' group borrowing for lift irrigation or deep tubewell schemes would operate such schemes in a manner that would ensure adequate water deliveries to each beneficiary and that would generate sufficient revenues to cover operating expenses and repay the capital 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 cost of investment may be charged;

36 Schedule C Page 4

(c) Farmers' contributions (includingobligatory purchase of LDB shares, own labor, and other contributionsin cash or kind);

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

(ii) for farmers cultivating land providing a pre- developmentnet return to family resources ranging from Rs 2,001 to.Rs 3,500 based on 1972 prices, a minimum 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 beneficiaries of schemes other than minor irrigation; for the purpose of determining the equivalent of small farmers and farmers among such beneficiaries,the definition of small farmer and the description of farmers set out in sub-paragraph (II) hereof shall be adopted to mean '"anyperson primarily engaged in an activity other than minor irrigation which provides a pre-development net return to family resources not exceedingRs 2,000" and "ranging from Rs 2,001 to Rs 3,500," respectively. "Net return to family resources" shall mean gross family income from the activity less costs actually incurred.

(e) Repayment periods to be based on the ultimate borrower's repayment capacity and life of assets to be purchased, but not to exceed 15 years (includinggrace periods where necessary).

III. General

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

(b) Security would be in accordance with arrangementsbetween lending banks and ARDC;

(c) ARDCwould refinance only sound sub-projects which, on the basis of careful study were considered to be financially viable, have a minimum financial rate of return of 15%, and backed with satisfactorytechnical and administrative 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 C Page 5

(d) ARDC would forward all applicationsfor refinance of diversified lending schemes having total investment costs of US$0.5 M equivalent and over, with appraisal reports and all other relevant data, to IDA for final approval.

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

38 Schedule D Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Small Farmer Definition

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

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

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

(b) "net return to family resources" shall mean gross family income from the land, less costs actually incurred (including cash value of farmer's own inputs including seed, fertilizer, hired human labor, hired bullock labor, feed consumed by family bullocks, irrigation charges, land revenue, interest on crop loan, and rent on leased land); and

(c) the amounts for the current year shall be arrived at by applying the current price index of the All-India Agricultural Laborers Index 1/ for the State in which the land is located to the amount set forth in paragraph 1 hereto.

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

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Bank Group Projects Financed Through ARDC

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

A. Agricultural Credit Projects

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

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

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

5. The land development program under IDA projects did not initially progress well due to lack of demand by farmers for land leveling loans. Much of the land leveling work was done by family labor, for which no borrowing was required. Also a legal ceiling on land holdings, difficulties in creation of mortgages by borrowers in favor of LDB, and inadequate water in canals 40 ANNEX 1 Page 2 restricted demand. The demand for minor irrigation investments was very high, however, and consequently, after consultation with GOI and IDA, there was a reallocation of funds from the land development component to minor irrigation in the Andhra Pradesh, Tamil Nadu, Maharashtra and Karnataka projects. In Haryana, there was reallocation of credit from farm mechanization to minor irrigation. The position of IDA credit for minor irrigation before and after reallocations is presented in the following table:

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

Original IDA IDA Credit Credit Allo- After Reallo- Name of Project Category cation cation

1. Gujarat M.I. 27.30 32.48 F.M. 7.40 2.50 Others* 0.30 0.02 35.00 35.00 2. Andhra Pradesh M.I. 14.00 16.32 L.D. 5.24 3.04 F.M. 4.88 4.79 Others* 0.28 0.25 24.40 24.40 3. Haryana M.I. 4.40 12.40 F.M. 17.40 12.10 (Tractors) Harvesters and Combines 0.50 0.50 Spare Parts 2.70 25.00 25.00 4. Maharashtra M.I. 22.68 26.94 L.D. 2.72 1.20 Others* 4.60 1.86 30.00 30.00 5. Tamil Nadu M.I. 22.70 24.06 L.D. 2.10 0.74 F.M. 5.00 6.15 Others* 5.20 4.05 35.00 35.00 6. Karnataka M.I. 13.10 25.00 L.D. 10.00 2.00 F.M. 6.70 9.20 Others* 10.20 3.80 40.00 40.00

* Other items include procurement of well drilling rigs, earth moving equipment, consultancy services, spare parts, etc. 41 ANNEX I Page 3

6. The agricultural credit projects for Gujarat, Punjab, Andhra Pradesh, Tamil Nadu, Haryana and Karnataka had envisaged, inter alia, financing of farm mechanization equipment in particular, tractors. The progress of disbursements under this component was halted in the earlier project years mainly due to procurement problems of financing domestically made tractors. This issue was resolved by IDA Board action in December 1974, and progress has been 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 resulted from experience gained by ARDC through successful implementation of the above mentioned State agricultural credit projects, was to transfer to ARDC appraisal functions formerly done by IDA and for ARDC to commit specific amounts for individual schemes within an IDA-approved overall lending program. The project, besides replacing the State credit projects, enabled IDA to support worthwhile schemes too small for IDA to appraise individually.

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

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

Performance

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

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

12. The total number of schemes sanctioned was 828 for which the total ARDC commitment amounted to Rs 2,838 M (US$315 M), an average of Rs 3.4 M (US$0.4 M) per scheme. About 15% of the ARDC commitment (17% of schemes) was in the less developed eastern and north eastern States; 28% 42 ANNEX 1 Page 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 for minor 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 staff training included in the project. The program is well under way and full details are in Annex 6.

14. The project also included the following features: (i) a revised small farmer definition; (ii) establishment of a standing committee to formulate common requirements for issuance of LDB debentures; (iii) common criteria relating overdues with eligibility for issuance of LDB debentures; and (iv) introduction of identified Districts having intensely developed or potential problem areas relating to groundwater for which additional studies would be required before ARDC sanctioned schemes there. All of these features have been successfully implemented and show good results.

15. The ARDC I provided for a study of the feasibility of merging short-term and long-term cooperative credit institutions. The study has been completed and the report strongly recommends a merger; GOI is expected shortly to decide on implementation of the recommendations.

16. The ARDC I is making satisfactory progress; disbursements are up to appraisal estimates, all project terms and conditions fulfilled, and all studies completed. Although it is too early to assess project benefits the results of ARDC lending for similar projects indicate that rates of return for 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, and Karnataka agricultural wholesale markets are under implementation. These projects were designed to help with establishment of wholesale markets in a number of towns in Bihar and Karnataka. Progress under the Bihar project has generally been satisfactory. Markets construction in Bihar was delayed due to legal challenges arising out of the State's acquisition of land for market sites; 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 of the State and Central Government. The project is being monitored closely to try and bring about the necessary improvements in implementation.

43 ANNEX 1 Page 5

D. Fruit Processing and Marketing

18. The Himachal Pradesh apple processing and marketing project is designed to promote apple processing and marketing. The project, which comprised 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-project report has been prepared by the Himachal Pradesh Horticulture Produce Market- ing and Processing Corporation Ltd., in respect of two packing and grading centers, and these have been earmarked to two commercial banks for implementation.

E. Dairy Development

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

F. Command Area Development

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

44 ANNEX I Page 6 the need to find resources for development of farms, the owners of which were not eligible for normal banking loans. The ARDC, in consultation with GOI, has now formulated a scheme to overcome this and development should now proceed.

G. Integrated Cotton Development

21. The Integrated Cotton Development project included all aspects relating to production of improved varieties of cotton and processing in selected areas of Punjab, Haryana and Maharashtra. It envisages modernization of ginning and cotton seed processing facilities and research. A significant feature of this project is provision of short-term funds for financing short- term credit requirements of cotton growers. For the first time, ARDC will be providing refinance against short-term credit. Commercial banks which will participate in the project have been identified, and necessary guidelines issued by ARDC.

H. Drought Prone Areas Project

22. The Drought Prone Areas project, which covers six Districts in Maharashtra, Andhra Pradesh, Karnataka and Rajasthan, envisages investments in 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, legislative and institutional changes required to facilitate credit flow, and the role to be played by various credit institutions in the area. The corporation has accordingly constituted separate studies for each State and has prepared banking plans for the six Districts.

I. Seeds Development

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

45 ANNEX I Page 7

Corporation (SSC). Detailed production programs, by variety and responsible institution, have been prepared for breeder, foundation and certified gen- erations. GOI and State Governments have made equity contributions to SSC thus ensuring financing of major project activity. Orders will shortly be placed for processing machinery to provide bridging capacity pending the construction 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 and disbursements is given in Table 1.

April 1977

46 ANNEX 1 Table 1

INDIA

AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Summary of Bank Group Projects Financed through ARDC

Credit Effective Closing Project IDA Disbursed to No. Date Date Cost Credit December 31.1976 ------US$ (H------

AGRICULTURAL CREDIT

Gujarat 191 9/70 3/75 67.0 35.0 35.0 Punjab 203 9/70 6/77 40.0 27.5 16.8 Andhra Pradesh 226 5/71 6/77 45.0 24.4 22.2 Haryana 249 11/71 6/77 44.5 25.0 25.0 Tamil Nadu 250 11/71 6/77 62.3 35.0 29.6 Karnataka 278 9/72 6/77 70.4 40.0 34.6 Maharashtra 293 1/73 6/77 51.9 30.0 30.0 Madhya Pradesh 391 10/73 12/77 59.7 33.0 30.1 Uttar Pradesh 392 10/73 12/77 72.5 38.0 20.0 Bihar 440 3/74 6/77 60.0 32.0 11.8 ARDC 540 8/75 12/77 168.5 75.0 31.2 West 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 2.4 Karnataka 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 0.2 Madhya 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 23.6 Chambal 562 9/75 12/79 46.6 24.0 1.9 Chambal (Rajasthan) 1011 12/74 6/81 91.5 52.0 9.6 Andhra 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 9.2 National 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 1 Table 2

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

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 from benefiting area (Rs) 9,055 6,742 3,210 10,678

Incremental net income from benefiting 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 the following four evaluation studies of land development and minor irrigation schemes:

(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 from the minor irrigation schemes are, however, preliminary.

March 25, 1977 ANNEX 1 Table 3 INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Selected Financial and Economic Indicators From Gujarat AgriculturalProject (191-IN) PCR

…------Area ---- 1/ Hardrock 1. Financial Results Per Farm (Saurashtra) Alluvial

Estimated average farm size - ha 8 6 Incremental gross irrigated area - ha 3.5 7.0 Investmentcost - Rs 2/ 18,300 34,900 Incrementalnet income from irrigation - Rs 3/ 4,000 7,400 Financial rate of return (%) 12 4/ 30

Completion Appraisal 2. Economic Rates of Return (%) Estimate Estimate

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

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

2/ Average per investment in minor irrigationin 1975 prices

3/ 1975 prices

4/ The low rate of return resulted from successivetwo years of severe drought.

49 SECONDAGRICULTURAL REPFNANCE AND DEVS.2?CORPORATION CREDIT FF03ECT

Preliminarv Resultsfron Farm B§fit Survev in.Andhra Pradesh Mricultural 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 Alluvium Ohr 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 (Rs)-! costs 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, 1 o conducted and analyzed by Andhra Pradesh Agricultural Development Bank (LDB). ANNEX 2 Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Groundwater and Minor Irrigation

Geology and Physiography

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

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

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

4. The peninsula with elevations generally ranging between 200 and 1,000 m occupies most of the country in the south and is an ancient stable plateau or shield developed on the underlying igneous and metamorphic rocks. A large area of the western part of the plateau has been covered with a thick series of horizontal lava beds (Deccan trap) and some younger sedimentary rocks have been deposited along the narrow coastal plains of both the Arabian Sea and the Bay of Bengal.

Climate

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

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

(b) north-central India -- eastern Rajasthan, Gujarat, Haryana, northern Madhya Pradesh, Uttar Pradesh and Bihar; 51 ANNEX 2 Page 2

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

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

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

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

8. The average temperature range throughout the year is 10C to 150 C in the southern coastal areas, increasing to 250 C or more in the northern inland. The coldest period throughout the country is in December-January when mean maximums vary from 290C in parts of the peninsula to 180C in the north and mean maximums from 240C in the extreme south to below 5°C in the north. During March to May, there is a steady rise in temperature with the highest values, exceeding 480 C, occurring in the north in May (particularly in the northwest desert areas). With the advent of the southwest monsoon by early June, there is a rapid fall in maximum temperatures in the central areas. Generally, temperatures are practically uniform over the two-thirds of the country which gets good rainfall during the monsoon. Temperatures generally begin to decline throughout the country by August.

9. Evaporation rates closely follow the seasons, reaching a peak in the summer months of April and May, particularly in the central areas where evaporation is highest. With the beginning of moisture-laden monsoon winds and 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 2 Page 3

Soils

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

11. Alluvial soils form the largest and mostimportant group, occurring principally in valleys of the Indo-Gangetic and Br#hmaputra river systems as well as other river valleys and along coastal areas. Occassional features of 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 generally well suited for irrigation of crops.

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

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

14. Laterite soils occur mostly in the south near margins of the peninsula. 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 six major regions: Indus Basin; the Ganges system; the Brahmaputra system; East Coast rivers; West Coast rivers, and the Rajasthan region. A summary of data on each region is in Table 1, and the location of principal rivers is on Map 12630.

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

53 ANNEX 2 Page 4

17. The annual flow pattern of rivers with sources in the Himalayas is markedly different from those originating in the peninsula area. In those with Himalayan sources, the dry weather flow is significantly increased by water from melting snows and glaciers, and at no time is the flow so reduced as in peninsula rivers where heavy discharges occur during monsoons followed by very low discharge (base flow from ground water inflow) during rainless months. Variations in mean monthly flows of peninsula rivers of the order of 1 to 300 are common.

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

19. Alluvial aquifers are the most important category both from the standpoint of present development as well as future potential. Water is developed from permeable silts, sands and occassional gravels within the alluvium by means of open (dug) wells and tubewells. Most of the alluvial aquifers are in the Indo-Gangetic plain and Brahmaputra valley, with minor additional areas along major river valleys and on the eastern and western coasts 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 tubewells for groundwater development are seldom drilled below depths of 300 to 500 m. The pumping rats from typical installations is 150-200 m /hsur for deep tubewells, 25-50 m /hour for shallow tubewells, and up to 25 m / hour for dug wells.

20. The "hard rock" area of groundwater occurrence is also of great importance because such a large area of the country is included (essentially all of the peninsula) and also because much of the area receives insufficient rainfall so that irrigation is essential to crop production. Aquifers of the area are the upper weathered and jointed zones of underlying crystalline igneous and metamorphic rocks (granites, gneisses, and schists). In the large area underlain by basalt flows (Deccan trap), the water occurs along interflow zones as well as in the upper weathered zone and joints or cracks in the rock. The depth of weathering varies, being typically 5 to 15 m, and occasionally 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 increase yield (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.

54 ANNEX 2 Page 5

21. Consolidated sediments, such as sandstone, occur primarily along coastal 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 rocks are typically covered with thin deposits of wind-blown sand or occasional alluvium. Because of scanty and unreliable rainfall, there is little opportunity for extensive additional groundwater development in this area.

23. The principal occurrence of groundwater in the mountain areas of northern and eastern States is from small alluvial deposits along stream valleys. 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 resulting from irrigation. In some areas, seepage from unlined irrigation canals is a major source of recharge. Lateral subsurface inflow from adjacent areas can be significant in some alluvial terrains, particularly along the southern foot hills of the Himalayas. Rivers and streams are not generally sources of recharge except where immediately adjacent to channels during flood runoff. Exceptions to this would include rivers crossing alluvial fans on lower Himalayan slopes and dissipation, by seepage, of flow in ephemeral streams of western desert areas.

25. Recent estimates of annual recharge in each State, together with present utilization, has been prepared by State groundwater organizations and CGWB and are given in Table 2. These estimates, amounting to about 31 M ha m total recharge, tend to be more qualitative than quantitative. The present need is for more precise evaluation of recharge from all sources, based upon 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 coast as well as a few limited interior locations. The principal coastal areas with salt water in aquifers are in southern West Bengal, Orissa, Tamil Nadu and Gujarat. Fairly extensive areas of saline groundwater are found in the interior in Punjab, Haryana, Rajasthan and Uttar Pradesh with more minor occurrences at scattered localities in Karnataka, Maharashtra and Andhra Pradesh. Many of the interior occurrences are the result of high evaporation in irrigated areas with inadequate drainage; in some cases salinity is concentrated in shallow zones and fresh water is encountered at depth.

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

55 ANNEX 2 Page 6 and Tamil Nadu. Almost all groundwater used is for irrigation. Industrial, domestic and livestock requirements are estimated to be less than 5% of total withdrawals. Growth in net area irrigated from wells and other sources since 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, and West Bengal comprise only 20% of the area of the country yet account for more than one half of groundwater used and net area irrigated from wells.

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

29. Some degree of control of groundwater utilization and development is becoming increasingly necessary in many localities in order to: protect water quality; protect existing water users by preventing excessive interference and lowering of water levels, and to prevent local developments from exceeding 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 minimum spacing between wells financed under these projects. The degree of control achieved may be unsatisfactory, however, because it does not apply to pri- vately financed developments.

30. There is general agreement that overdevelopment and related problems, such as water quality, exist (or will soon exist) in certain localities. It is difficult to define these localities geographically since hydrologic boundaries seldom coincide with political subdivisions. Since there is virtually no existing groundwater control legislation, and it does not appear that there will be within the next several years, it is recommended that parts of certain Districts within several States be designated, for this project, as "intensively developed and/or potential problem areas". It is further recommended that no investments be made for groundwater development in these particular localities until the appropriate State government has either instituted acceptable controls over sinking of new wells in those areas, or carried out further technical studies proving that there is no longer a problem in those areas and that such areas could, at the discretion of ARDC, be removed from the problem list.

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

56 ANNEX 2 Page 7 would generally be unacceptable. Actual field and laboratory measurements should be presented and some test drilling or test pumping (of adequate duration) might be required.

32. The areas of 57 Districts in ten States recommended for such designation as "Intensively Developed and/or Potential Problem Areas" are listed in Schedule A. In some of these areas listed, the problem may occur in only a part of the area and, upon submission of adequate justification, certain villages might be excluded from the designation; similarly, as additional development takes place or data becomes available, it may be necessary to add new areas.

33. Guideline criteria for minimum well spacing, well density, and permissible water quality for this project are given in Schedule B. The ARDC would be permitted to relax these criteria only after a careful review and approval of supporting data as to local conditions that would justify such action.

Staff and Institutions

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

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

36. In Bombay, the unit is headed by a deputy director assisted by two senior and two junior technical analysts; one more analyst is in the process of 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 an additional 50 persons on their technical staff -- about one-half being in minor 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 irrigation schemes proposed by States, both from technical feasibility (availability of water, proper design, etc.) and economic aspects (adequacy of cost

57 ANNEX 2 Page 8

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

38. Central Groundwater Board (CGWB). The CGWB was established in 1970 by GOI to replace the Exploratory Tubewells Organization which had been created in 1954 to investigate and test the thick alluvial aquifers of the Indo-Gangetic plain. In 1972, the groundwater wing of the Geological Survey of India was merged into CGWB to establish a single organization in central government concerned with groundwater investigation and development.

39. In addition to conducting special investigations throughout the country (including drilling and testing of wells), CGWB has the important responsibility of assisting State groundwater organizations and coordinating State programs. Experienced CGWB personnel are frequently assigned to work with States in building up and training local staffs. The CGWB headquarters are near New Delhi, with seven regional and seven special project offices throughout the country.

40. State Institutions. Almost all States have established organizations for conducting hydrological investigations as well as units which provide custom service in boring and deepening dug wells, and in drilling tubewells. Administratively, these organizations may be under any one of a number of headings such as Departments of Agriculture, Minor Irrigation, Public Works, Irrigation, Mines and Geology, etc. or Tubewell Corporations, Agro-Industry Corporations, etc. Unfortunately, in individual States these functions may be divided administratively, and this often hampers fullest coordination of groundwater 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 staff and strengthening capability, and many organizations are implementing such plans. All States are considered capable of preparing and analyzing schemes for this project although some may need assistance from ARDC or CGWB while they are building staff capability. The magnitude and rate of future lending under the project, in States with weaker staffs, will depend somewhat upon the rate at which staff can be strengthened.

Training

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

58 ANNEX 2 Page 9

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

March 1977

59 ANNEX 2 Table 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Surface Water Resources - Estimated Runoff Esti- mated Major River Catchment Annual Utilizable Region 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 4.9 Basin Beas Punjab Sutlej Haryana Himachal Pradesh

Ganges Ganges Uttar Pradesh 97.6 1,110 16.8 49.o 18.5 system Yamuna Haryana Chambal Rajasthan Chagara Madhya Pradesh Candak Bihar Kosi West Bengal

Bhrama- Brahmaputra Arunachal Pradesh 50.6 1,220 8.2 38.1 1.2 putra Subansiri Assam system Manas Nagaland Teesta Meghalaya West Bengal

East Cauvery Madhya Pradesh 121.0 1,090 26.1 41.2 Coast Krishna Bihar rivers Godavari West Bengal MAhanadi Orissa 41.9 Subarnarekha Andhra Pradesh Damodar Maharashtra Mysore Tamil Nadu West Tapti Gujarat 49.2 1,220 25.5 31.1 Coast Narmada Maharashtra rivers Mahi Mysore Sabarmati Kerala

Rajasthan Rajasthan 16.8 290 26.2 - -

Total: 370.6 - - 167.3 66.5

December 14, 1976

60 ANNEX 2 Table 2 INDIA SECOND AGRICULTURAL REFINANCE AND DEVELOPNENT CORPORATION CREDIT PROJECT

Estimated Groundwater Availability and Utilization - 1973/74

Annual Annual Unused Percent State Recharge Draft Balance Utilization ------M ha m --- -' Andhra Pradesh 3.26 1.05 2.21 32 Assam* 1.46 0.03 1.43 2 Bihar 2.57 0.61 1.96 24 Gujarat 1.22 o.83 0.39 68 Ilaryana 1.00 0.60 o.40 60 Jammu & Kashmir 0.25 0.01 0.24 4 Karnataka 1.28 0.38 0.90 30 Kerala O.94 0.01 0.93 1 Madhya Pradesh 3.05 o.49 2.56 16 Maharashtra 2.15 0.75 1.40 35 Orissa 1.27 0.20 1.07 16 Punjab 1.10 o.84 0.26 76 Rajasthan O.85 o.69 0.16 81 Tamil Nadu 1.46 O.86 o.60 59 Uttar Pradesh 7.65 3.33 4.32 44 West Bengal 1.95 0.39 1.56 20 Total: 31.46 11.07 20.39 35

December 14, 1976

* Includes other northeastern states.

61 ANTNEX2 Table 3

INDIA SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

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

State Canals Tanks Wells Others Total

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

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

State Groundwater Organization Staffing - November 1976

Groundwater Investigation Drilling and State Professional Sub-Professional Development-

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

Total: 1,145 978 4,320

December 14, 1976

63 ANNEX 2 Table 5

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Irrigation Wells

Anticipated Achievement as at June 30, 1974 (thousands)

Private State(deep) Electrified State Dug Wells Tubewells Tubewells Pumps

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

64 ANNEX 2 Table 6

INDIA SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Villages Electrified as on March 31, 1974 (thousands)

% Electrified State Total Number Electrified (of total)

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

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Cooperative Banks, Cooperative Land Development Banks and Commercial Banks

I. Cooperative Banks

Background

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

2. The agricultural cooperative system in India has been operating for several decades although its performance, especially at the primary level, has been far from satisfactory. Many PCS, are small in membership, financial resources and volume of business. This alone can account for a major portion of unsatisfactory operations. Small organizations cannot afford nor justify employment of qualified, competent, full-time management. Although PCSs extend short- or medium-term loans, the preponderance of such loans are short-term. Many PCSs have incurred excessively high overdue loans and bad debts; this, along with poor financial operations, raises a question as to their viability. Concern in this area has resulted in top priority being given to reorganization and rehabilitation of weak primary societies.

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

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

66 ANNEX 3 Page 2 committee, which strongly supports a merger, has been published, and GOI has asked RBI to appoint a cell to further study the committee's recommendation. The GOI expects to make a decision on the recommended merger during the next few months. A summary of the main recommedations of the committee is in 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, and marketing of agricultural produce. The number of PCSs has decreased from about 157,800 at the end of June 1972 to about 153,800 at the end of June 1974. During the same period, however, total membership increased from about 32 million to 35 million. About 18,100 dormant societies were await- ing final action either by revitalization or by liquidation. The recovery position of PCS has been deteriorating over a number of years and has reached the point that prompt action needs to be taken if many societies are to remain viable. A more complete discussion on overdues can be found later in paras 16-19.

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 all PCSs and supervises lending activities. Each DCCB generally has a number of branch offices in the District and a staff of credit inspectors to carry out its functions. Caliber of management and staff varies considerably. The overdues 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 the cooperative credit structure in each State. Members of SCB are the DCCB and the State government. The SCB provides short- and medium-term loans to finance farmers through their member PCS. The preponderance of loans issued by SCB is short-term credit for seasonal agricultural operations. The problems of overdues is not so serious at the SCB level since the overdues are mostly absorbed at lower tiers. Although overdues in aggregate terms have been increasing at the SCB level in recent years, improvements are showing in some States (Table 1).

Rescheduling of Cooperative Overdues

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

67 ANNEX 3 Page 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 development banks (PLDBs), or branches of the SLDB, at village level. The pattern in most States is a federal structure while seven State/union territories have a unitary structure. Two States have a mixed organizational pattern.

10. The PLDB raise funds from share capital and deposits but the most important source are borrowings from SLDB. The SLDB funds mainly come from share capital, deposits, loans and grants from State governments, and sale of 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 will be used, and a financial analysis is made to determine incremental income that will accrue to the applicant as a result of the investment. Loan repayment is expected to be made from incremental income. The PLDB committees approve loans using lending criteria established at the SLDB level.

12. Lending operations, which had been declining, are presently showing significant growth. The main problem of the LDB is heavy overdues, the level of which varies from State to State, and which, in some States, continues to persist at high levels. The RBI and the Agricultural Refinance and Develop- ment Corporation (ARDC) have invoked sanctions in an effort to bring about improvements in the overdues situation and provisional figures for 1975/76 show some improvements (Table 2). Eligibility of PLDB and SLDB branches for issuance of new debentures during the year is related directly to recovery performance during the preceding years. The amount of the lending program is a specified percentage of disbursements made during the previous year or the 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 average Range of Overdues for the previous three years, (% of Demands) whichever is higher)

0 - 25 Unrestricted 26 - 35 80 36 - 45 70 46 - 55 60 56 - 60 50 61 - 100 Nil

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

68 ANNEX 3 Page 4 amendments to the criteria, usually of a temporary nature, may be made as agreed between IDA and ARDC. These restrictions, although severe, are necessary and already have led to some successful State-supported recovery drives to avoid a reduction in lending programs.

14. Management is perhaps the largest factor contributing to poor LDB performance and high overdues. It is imperative that management be upgraded and that LDB staff be improved in order to handle the increasing lending program and more complex financing. For that reason, an extensive LDB staff training program which started under ARDC I would be included in this project. Most LDB management staff are seconded from State government cooperative departments and are subject to transfer at any time. It would be advisable for such staff to be on direct LDB establishment; this would provide better job satisfaction and more continuity. Similarly, it would be beneficial for LDBs 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 cooperative banking structure over which it has statutory control. It has a special Agricultural Credit Department whose functions are to: (i) study all questions of agricultural credit and be available for consultation by central government, State government, SCB, and other banking organizations; and (ii) coordinate RBI agricultural credit operations and its relations with SCB and any other banks engaged in agricultural credit. The RBI conducts inspections of all cooperative banks, gives direction as to the purpose for which advances are to be made, authorizes the opening of new branches and controls the raising of funds from the issue of ordinary debentures.

Overdues

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

69 ANNEX 3 Page 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, members of the Managing Committees of the cooperative have displayed an attitude of indifference in the matter of recovery.

17. The team appointed by RBI recommended a number of steps to be taken to gain control of this problem. Their recommendations included automatic disqualification of Managing Committee/Board Members, denial of new credit and voting rights to defaulters, as well as amendments to the cooperative societies act in the various States empowering the Registrar of Cooperative Societies to issue orders of his own motion to recover cooperative arrears as land revenue. The team also took the position that defaulters should not be financed by State governments, not even in the form of inputs. Very often there is a lack of bidders when defaulters' lands are put to auction. It was recommended, therefore, that concerned State governments purchase the lands in auction or set up a farming corporation which may take the land after settling the debt, and dispose of it by sale or long-term lease. The RBI has conveyed these recommendations to State governments and cooperative banks.

18. The RBI and ARDC have invoked certain sanctions as discussed in paragraph 12. These sanctions, while restricting lending and, therefore, agricultural development in those areas which are served by cooperative lending institutions which have high overdues, should be helpful in getting cooperative institutions to face up to their problems and to take corrective actions. Although there is extreme reluctance to do so, a policy on re-scheduling loans should be developed whereby the agricultural producer can be given more time to recover from adversities such as natural calamities, and meet loan repayments. The present policy of spreading a missed payment over the next four years may not be an adequate solution. Perhaps it would be more beneficial to defer payments to the end of the loan thereby giving 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 collection of loans. In addition, management must see that loans are properly supervised, and remain alert to possible problems which might arise. When defaults occur, management must be willing and able to initiate action to collect the loans. Cooperation of State governments and the judicial system is 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 has taken some time to develop staff expertise to handle agricultural loans. Bank branches have been established in rural areas to reach rural population and to permit banks to better supervise credit. Additional bank branches are

70 ANNEX 3 Page 6 proposed and will further broaden CB network. Although relatively new to agricultural lending, CBs have become an important part of agricultural finance and complement the cooperative banking system. Since CBs have acquired and trained a specialist staff and opened numerous branches, they are in a better position to play a more significant role in agricultural credit.

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

Regional Rural Banks (RRB)

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

Village Adoption Scheme

23. The CBs have been adopting villages for intensive financing of agriculture. Such a scheme not only permits banks to be in a position to meet credit requirements for groups of farmers but also enables them to keep 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 agricultural lending by establishing Agricultural Development Branches in each of the States. These provide comprehensive credit facilities for minor irrigation, land improvements, and seasonal requirements.

Farmers' Service Societies

25. The CBs have established 51 Farmer Service Societies mainly in small farmer development areas in 12 States to provide farmers not only credit but also agricultural inputs and extension services at one location. This eliminates the need for farmers to approach several different agencies and face possible constraints such as giving adequate security to different institutions or incurring a multiplicity of service charges. As these societies have only fairly recently been formed, it is too early yet to assess to what extent they are successful. 71 ANNEX 3 Page 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 granted to 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, primary agricultural cooperative societies have been ceded to CBs so that weak and dormant societies may be activated. This arrangement has enabled the CB to serve a cluster of borrowers through the medium of a society, and helped them to enlarge their coverage. Some 22 CBs are participating in the scheme in eleven States. In all, 3,241 societies have been taken over of which 1,831 have been financed.

Lead Bank Scheme

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

72 ANNEX 3 Appendix 1 Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Summary of the Main Recommendations of the Committee on Integration of Cooperative Credit Institutions

1. The terms of reference of the Committee included:

(a) To review the position of the two wings of the cooperative credit structure in the different State/union territories and to examine whether integration of the two wings will be advisable from the point of view of serving the objective of lending adequate support to the massive investment program in agriculture;

(b) To examine whether the integration may be brought about simultaneously at all levels of the two wings of the cooperative credit structure or may it be done in a phased manner at the different levels;

(c) To examine the structure of management and the staffing pattern at the intermediate and higher levels of the integrated units of the two wings of the cooperative credit structure, so that they may be able to handle satisfactorily short-term, medium-term and long-term agricultural credit;

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

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

(f) To make recommendations on other related aspects, which, in the opinion of the Committee, are important. 73 ANNEX 3 Appendix 1 Page 2

2. The principal recommendations of the Committee included:

(a) That the two wings of the cooperative credit structure should be integrated at all levels, and that a period of three years would be adequate to complete the integration from the time a decision is taken to bring about integration.

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

(c) That wherever the banks have to retain Government staff, pending appointment of their own staff, the control over the Government staff should vest with the Banks and such staff should not be liable to frequent transfers. In suitable cases, Government staff who have acquired expertise and are working in the banks may be absorbed in the bank's services.

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

(e) That wherever land cannot be offered as security, hypothecation of movable assets created out of loans granted 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 landless laborers, loans may be backed by group guarantees.

(f) Where land is available as security for loan, to simplify the procedure for creating security in favor of the PCS, a new form of security should be created, i.e., a special charge to be known as GEHAN; this can be effected by a mere declaration by the borrowers and at the same time would have all the characteristics of a valid mortgage without its cumbersome formalities. The charge so created in favor of the society should be assigned in favor of the higher financing agency for the purpose of obtaining necessary resources for loaning. 74 ANNEX 3 Appendix 2 Page 1

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 September 1969, an Expert Group with the following terms of reference:

(i) To examine the provisions of the State laws relating to abolition of intermediaries, land tenure and tenancy reforms and similar other enactments which confer different degrees of rights in land on the tenant-cultivators and landholders belonging to backward classes, tribals, etc., with particular reference to right of transferability through sale or mortgage or right to create a charge on land/crops and to suggest modifications, if any, required to facilitate their dealings with the commercial banks;

(ii) To examine the State laws relating to agricultural debt relief and regulation of moneylending, with particular reference to regulation of interest rates, scaling down of past debts, priority to charges among the different credit agencies, recovery of overdues, etc., and to suggest modifications, if required, in favor of institutional credit agencies;

(iii) To exam-ine the provisions of the State legislation imposing ceiling on land holdings, and to suggest modifications, if any, in regard to lands coming into the possession of the institutional credit agencies, because of foreclosures;

(iv) To examine the provisions of various land reforms legislation relating to the regulations on sale of land applicable to lands coming into the possession of institutional credit agencies during the process of recovery of loans in respect of: (a) categories of persons to whom agricultural land could 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., and to suggest amendments or administrative measures for safe- guarding the interest of the institutional credit agencies;

(v) Other related measures/actions which will increase the commercial banks' participation in agricultural development program. 75 ANNEX 3 Appendix 2 Page 2

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 restricted rights of alienation in their lands or interests therein - such as landholders belonging to schedule tribes/castes, backward classes/castes, tenant cultivators, fragment holders, allottees of Bhoodan land and of Government land - should be vested with rights to alienate land/interest in land held by them in favor of banks for the purpose of obtaining loans for agricultural purposes;

(ii) In the case of share-croppers, who form a special category and who do not have any recorded rights in land, banks would be able to grant loans only if their status is properly recorded in the record of land rights. Further, they should be enabled to create a charge on the crops raised by them, notwithstanding the fact that they are not the owners of the land over which the crop is raised by them.

Priority of Charges

(iii) The general principle of priority as between institutional credit 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 in favor of cooperatives does not adversely affect commercial banks. However, all institutional credit agencies should have priority of charge vis-a-vis private credit agencies.

(iv) The restriction of alienation of land subject to a charge in favor of a cooperative should be relaxed so as to permit subsequent alienation thereof for securing supplementary credit from another institutional credit agency. This would be similar to the provision by which property subject to a charge in favor of a cooperative credit society is allowed to be alienated in favor of a land development bank.

(v) On the same basis, where crop loan for current production purposes is granted by one institutional credit agency and term loan for development purposes is granted by another institutional credit agency against common security, priority of security should accrue to the agency providing term loan provided the encumbrance in its favor was made with the knowledge and concurrence of the institution holding the 76 ANNEX 3 Appendix 2 Page 3

encumbrance for crop loan for current production purposes. The existing priorities under the cooperative legislation as between the cooperative credit societies and land mortgage banks will remain unaffected.

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

(vii) On the analogy that the simplified procedure pertaining to the creation of a charge on land/interest in land by declaration in favor of cooperatives facilitates expeditious disposal of loan applications, provision should be made to enable agriculturists to create a charge on land/interest therein by declaration in favor of commercial banks. Appropriate arrangements should also be made to have such charge noted in the record of rights and in the office of the Sub-Registrar.

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

Recovery and other Operational Difficulties

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

(x) To facilitate prompt recovery of dues of commercial banks without having to resort to protracted and time consuming litigation in civil courts, the State Government should empower an official with authority to issue an order, having the force of a decree of a civil court, for payment of any sum due to a bank by sale of the property charged/mortgaged in favor of the bank.

(xi) As banks may have need to foreclose mortgages of land executed in their favor, bring the property to sale and purchase the property if there are no bidders at auctions conducted for the purpose, they should be permitted to purchase the land and, if necessary, acquire land in excess of the ceiling limit fixed. However, State Governments may fix a time limit within which land acquired by banks is to be sold. Ultimate disposal of land by banks will, of source, have to be subject to State enactments as regards the persons to whom the land can be sold etc.

77 ANNEX 3 Appendix 2 Page 4

(xii) In order to facilitate commercial banks financing agriculturists through primary agricultural credit societies, the societies should be made eligible to borrow from commercial banks. Fur- ther, the commercial banks concerned should be eligible for such facilities as are ordinarily available to a central cooperative bank.

Administrative Measures

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

(xiv) Meanwhile, it is urgently necessary to prepare and maintain interim registers indicating the existence of share-croppers and other informal tenants and the particulars of land cultivated by them; unless this is done, this class of cultivators may not be able to get adequate support from institutional credit agencies.

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

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

(xvii) The number of centers where equitable mortgages can be created in favor of commercial banks for the purposes of agricultural borrowing needs to be increased until such time as the legislative and other measures recommended by the Group are given effect to. 78

Source: Report of the Expert Group on State Enactments having a bearing on Commercial Banks lending to Agriculture - Bombay, 1971. ANNEX 3 Appendix 3 Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

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

A Statewise review of the organization for agricultural institutional credit and bottlenecks to credit flow are presented in the following paragraphs:

(i) Andhra Pradesh

Short Term Cooperative Credit Structure

Twenty six district central cooperative banks (DCCB) have federated to form a State cooperative bank (SCB) at apex level and credit requirements are being met by nearly 15,000 primary affiliated agricultural cooperative credit societies (PCS) at the village level. Twelve DCCB have, however, been in the process of rehabilitation since 1972, which means that provision of seasonal agricultural and marketing credit is hampered considerably and this will affect development. PCS have also been taken up for reorganization with the ultimate aim of having only 7,000 viable units, each having a minimum loan business of Rs 0.2 M. The Reserve Bank of India (RBI) has been watching this program 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 Andhra Pradesh Cooperative Central Agricultural Development Bank at the apex level with 201 primary agricultural credit development banks (PLDB) at village level. PLDB operations, more particularly the recovery performance of the banks during 1975-76, have been quite encouraging. No serious bottlenecks are envisaged in their ability to provide adequate credit.

Commercial Banks

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

79 ANNEX 3 Appendix 3 Page 2 par with the cooperative banks insofar as their lendings to cooperative societies are concerned. As regards their direct lendings, certain concessions on registration charges and on encumbrance certificates have also been extended to all borrowers owning up to 5 acres of wet land or 10 acres of dry land irrespective of whether they borrowed from CB or cooperatives. The State Government has also prepared a draft Bill on the lines of the recommendations of the Talwar Committee (see Appendix 2).

(ii) Bihar

Short Term Cooperative Credit Structure

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 entire intermediary tier comprising 28 DCCB has been identified as weak. Sixteen banks have been taken up for rehabilitation under the central sector plan with the approval of the Government of India (GOI). The high level of overdues and low operational efficiency has been responsible for the slow progress of cooperative credit. However, the recovery performance of DCCB is reported to have considerably improved in 1975-76 enabling many of these banks to become eligible for credit limits from RBI in the current year.

Long Term Cooperative Credit Structure

The Bihar Rajya Sahakari Bhoomi Vikas Bank Ltd., has a network of 124 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% in 1975-76. As many as 116 branches are now eligible for unrestricted lending after taking into account the State Government contribution to equity up to 10% of demand. A notable defect in the system is that key personnel are drawn from the various departments of the State Government and as a result LDB control over them is limited. An Ordinance issued by the State Government in December 1975, does not facilitate diversification of lendings by LDB. A section of the Ordinance, by implication, requires LDB to provide loans only for purposes connected with land.

Commercial Banks

At the end of June 1976, there were 953 CB branches of which 414 were in rural centers. Further proposals are under way to open about 350 offices in the State, mostly in the unbanked rural and semi-urban and urban centers. Two regional rural banks (RRB) have also been established. During 1975, CB advanced Rs 248.5 M as direct advances, and Rs 66.5 M as indirect advances for agriculture. Of the direct advances, nearly 80% were granted for acquiring farm machinery such as tractors, pumpsets, and installation of tubewells.

80 ANNEX 3 Appendix 3 Page 3

Difficulties of Commercial Banks

The recommendations of the Talwar Committee have been accepted only partially. The State Government is expected to promulgate an Ordinance somewhat on the lines recommended by the Talwar Committee so that similar facilities are available to all institutions in providing agricultural credit. The paucity of trained staff and inadequate staff of the branches in rural areas is another difficulty. To overcome this, CB staff are trained in the agricultural project courses organized as part of ARC Credit Project (ARDC I) at College 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 has hindered regular flow of bank credit to agriculture and contributed to overdues. (b) There has been delay in consolidation of land holdings and consequently 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 underlines the need for extension support.

(iii) Gujarat

Short Term Cooperative Credit Structure

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

Long Term Cooperative Credit Structure

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

Commercial Banks

At the end of June 1975, 1,166 CB branches were operating in 19 districts of the State. The State Government has generally been averse to CB financing long term investments in agriculture. The recommendations of the Talwar Committee L..- -1- to be given effect to, hence CB do not enjoy the same facilities as those of cooperative banks. 81 ANNEX 3 Appendix 3 Page 4

(iv) Haryana

Short Term Cooperative Credit Structure

Twelve DCCB have federated to form the Haryana State Cooperative Bank Ltd. at the apex level. 2,138 PCS are functioning and all the societies are viable having a minimum loan business of Rs 0.3 M each; which is more than the RBI recommended level of Rs 0.2 M. The structure is quite strong and can be expected to take care of the seasonal credit and marketing requirements of farmers.

Long Term Cooperative Credit Structure

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

Commercial Banks

390 branches of scheduled CB are functioning in the State, of which 158 are operating in rural areas. The State Government has passed legislation giving effect to the recommendations of the Talwar Committee. The State Gov- ernment has also frequently reviewed the implementation of ARDC schemes and assisted in the removal of bottlenecks.

(v) Jammu & Kashmir

Short Term Cooperative Credit Structure

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

Long Term Credit Cooperative Structure

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

82 ANNEX 3 Appendix 3 Page 5

Commercial Banks There 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 holdings are small. The State is surplus in fruits and other horticultural produce, and marketing is a problem because of the nature of terrain and transport problems. These constraints inhibit flow of term credit.

(vi) Karnataka

Short Term Cooperative Credit Structure

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

Long Term Cooperative Credit Structure

The Karnataka State Cooperative Land Development Bank Ltd., has 176 PLDB affiliated to it. The Bank floated debentures of the order of Rs 184 M in 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 and due to high overdues the others will have a reduced lending program. Diver- sification of lending operations of the bank is hampered by the provision in the Statute which stipulates creation of mortgage of land as security for all loans.

Commercial Banks

There were 1,852 CB branches as on March 26, 1976 functioning in the State. The State Government has accepted the recommendations of the Talwar Committee and has enacted Karnataka Agricultural Credit Operations and Miscel- laneous Provisions Act, 1974. This enactment has, by and large, removed constraints 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 districts are drought affected and programs are to be specially tailored to those areas. Technical guidance from extension services is reported to be inadequate.

83 ANNEX 3 Appendix 3 Page 6

(vii) Kerala

Short Term Cooperative Credit Structure

The Kerala State Cooperative Bank has 11 DCCB affiliated to it with 1,731 PCS at the village level. An RBI committee examined the justification for continuance of DCCB. Taking note of their financial position and organizational arrangements, the committee felt that DCCB were not equipped to take up the responsibility of direct financing in a large area and a five year time limit has been recommended for improving their operations. PCS have been taken up for reorganization. When this program is completed, there would be 1,600 viable societies. Recently, another committee has recommended the conversion of about 168 societies as farmers' service societies.

Long Term Cooperative Credit Structure

The long term cooperative structure is federal and there are 30 PLDB functioning in addition to the SLDB. These banks had disbursed loans of the order of Rs 34.6 M at the end of June 1975, and the recovery performance has been encouraging. Although the Kerala Cooperative Land Mortgages Banks Act, 1960, as such, does not stipulate grant loans for purposes of acquisition of land and land improvements only, the byelaws of the bank restrict the granting of loans only for land and land improvement purposes. To diversify the lending 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 CB branches. In view of the small land holdings in Kerala, there have been limitations for investment credit for agriculture such as farm mechanization equipment. CB are yet to make agricultural credit on an 'area' basis on a sizeable scale. The State Government has not so far implemented the recommendations of the Talwar Committee. The number of places where equitable mortgages can be created is also limited.

(viii) Madhya Pradesh

Short Term Cooperative Credit Structure

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

Long Term Cooperative Credit Structure

The long term cooperative credit structure in Madhya Pradesh is federal with 45 PLDB at district level. There has been a steady growth of LDB business and there has also been an improvement in the number of branches which are eligible for unrestricted lending during the current year. 84 ANNEX 3 Appendix 3 Page 7

Commercial Banks

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

Problems Inhibiting the Flow of Credit

The main difficulties experienced by the banks in agricultural lending are: (a) Adequate assistance from extension agencies is not always available to CB. Identification of borrowers and canvassing of loan applications is not done by the Agriculture Department to the extent required. (b) Land records are not up to date in some cases. (c) Verification of utilization of loans given by LDB is done by the State Government department and there is delay in furnishing of utilization verification certificates leading to delay in the disbursement of subsequent installments.

(ix) Maharashtra

Short Term Cooperative Credit Structure

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

Long Term Cooperative Credit Structure

The long term cooperative credit structure is unitary and the Maharashtra State Cooperative Land Development Bank Ltd., functions through its 27 branches and 271 sub-branches. One of the disquieting features of the working of the long term structure is the high level of overdues, attributed partly due to the vagaries of nature. The IDA Supervision Mission which visited Maharashtra in December, 1975 had recommended that the LDB should: (a) make determined efforts to improve recoveries; (b) review its interest rates to ensure a spread adequate to meet administrative expenses and to ANNEX 3 Appendix 3 Page 8

maintain acceptable reserves; (c) to review its organization with a view to reducing its administrative expenses; and (d) write off bad debts considered by the commitc..Ewhich looked into the problem of overdues to be irrecoverable, and create adequate reserves for bad and doubtful debts. The LDB is taking steps to remedy the situation and the ARDC has also been following it up so that speedy solutions could be arrived at. The State Government has recently agreed that dairy development is one of the purposes for which LDB can advance loans.

Commercial Banks

Maharashtra is served by a good network of 2,381 CB branches. The working of the lead bank scheme was recently reviewed by RBI and certain deficiencies in its oparation, such as slow progress in regard to formulation of district credit plans, ineffective linkages between the lead bank and the operating banks and government agencies, and lack of appreciation on the part of government officials to propose suitable projects have come to light. A number of suggestions have been offered for ensuring effective operation of the scheme with emphasis on formulation of bankable schemes dovetailed to district development plans, SFDA program etc. Despite these deficiencies in the working of the lead bank schemes, some CB have made notable progress, particularly under ARDC refinanced schemes. The State Government has also accepted and given effect to the recommendations of the Talwar Committee. The relevant Act extends to CB special privileges available to cooperatives under the Maharashtra State Cooperative Societies Act in the matter of creation of charges, recovery of dues by banks, and settlement of disputes through arbi- tration, etc.

(x) Orissa

Short Term Cooperative Credit Structure

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

Long Term Cooperative Credit Structure

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 PLDB during the past two years. The recovery position of these banks has also been good. As mortgage of land is essential for loans from LDB, the SLDB cannot lend for diversified purposes without amendment to the relative Act. The study team constituted by RBI to prepare a Banking Plan for the IDA Eastern Region Foodgrain Project has made a number of recommendations to improve the working of LDB and for facilitating greater involvement by CB in term lending.

86 ANNEX 3 Appendix 3 Page 9

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 particularly under the ARDC schemes. The bulk of the refinance sanctioned by ARDC to CB has been for minor irrigation investments to be implemented by the Orissa Lift Irrigation Corporation. There has been a progressive increase in the number of CB branches in the eastern States, including Orissa. The State Government has enacted the Agricultural Credit Operations and Miscellaneous Provision (Banks) Act, 1975 on the lines recommended by the Talwar Committee making available to CB borrowers the same facilities as are admissible to the cooperatives. The rules under this Act are being framed.

Common Problems

The existence of unsurveyed land in some districts has tended to discourage institutional lending. Unless legislative provisions to protect the interests of the banks are taken they may not come forward to extend credit on a larger scale. An RBI study team has recommended the enactment of legislation towards removing this lacuna and the State Government is actively considering the proposal. About 38% of the population in Orissa constitutes nomadic tribals. The scheme of development for the betterment of the tribals should 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 IDA Mission has proposed a timebound action program for accelerating the tempo of agricultural lending in the State. The ARDC study team report has been accepted by the State Government and action would emerge on the basis of recommendations 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. The high level of overdues has been hampering the flow of credit especially from RBI.

Long Term Cooperative Credit Structure

The Punjab State Cooperative Land Mortgage Bank Ltd., has 42 PLDB affiliated to it. Due to continuous exploitation of groundwater resources in the 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 better water management and for diversified purposes.

87 AN4NEX 3 Appendix 3 Page 10

Commercial Banks

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

(xii) Rajasthan

The entire State is subject to extreme climatic conditions with 9 districts drought prone. In 5 districts there is a heavy concentration of tribal population. These factors affect investment opportunities.

Short Term Cooperative Credit Structure

RBI had made a detailed study of the working of the short term cooperative credit structure and has recommended the merger of a few weak DCCB and also a program of reorganization of PCS. The RBI report has been accepted by the State Government. The work relating to reorganization of societies is to be completed in a phased manner.

Long Term Cooperative Credit Structure

The long term cooperative credit structure is a two tier system, viz., the State land development bank at State level and PLDB at district or 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 unrestricted lending after taking into account the State Government contribution to equity. This improved recovery performance gives impetus to LDB to lend on a larger scale. An RBI proposal for a Management Trainee scheme has also been implemented 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 statutory requirement of mortgage of land prevents diversification of LDB lending operations.

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 loans of about Rs 295 M. The State government has enacted Rajasthan Agricultural Credit Operation (Removal of Difficulties) Act and consequently CB have been Dlaced on par with cooperative banks in the matter of financing agriculture.

Problems Common to Banks

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

88 ANNEX 3 Appendix 3 Page 11 of pumpsets. (c) Greater care is required to be exercised in the further exploitation of underground water resources in certain parts of the districts of Barmer, Ganganagar, Jaisalmer, Jalore, Jodhpur and Pali districts.

(xiii) Tamil Nadu

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

Long Term Cooperative Credit Structure

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 recovery performance and it is understood that the bank is likely to reschedule these loans. LDB Act stipulates that loans by LDB should be only for purposes pertaining to development of land as may be prescribed, and against mortgage of 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 precluded from lending for minor irrigation investments as a matter of governmental policy; this has reduced the volume of their business. CB advances have been for diversified purposes such as plantations, fisheries, etc. The State Government is yet to implement the recommendation of Talwar Committee; RBI has taken this up with the State Government.

(xiv) Uttar Pradesh

There are 55 DCCB in Uttar Pradesh with the Apex Cooperative bank at the State level. Short term requirements of farmers are met by nearly 22,000 PCS at the village level. Recently, the State Government launched a program of reorganization of PCS. After the reorganization is completed, the number of viable societies would be brought down to nearly 8,000. The recovery performances of DCCB in 1975-76 have been satisfactory. Conse- quently, all the banks are eligible for credit limit from RBI. Some of the identified weak cooperatives have been brought under a rehabilitation program.

Long Term Cooperative Credit Structure

The Uttar Pradesh SLDB functions through 209 branches. These branches have maintained good recovery performance in 1975-76 and as many as 204 branches are entitled to unrestricted lending program in the current year. Before the launching of the UP Agricultural Credit Project, LDB had certain constraints such as non-involvement in scheme formulation, inadequate technical performance, and inadequate staff for processing of loan applications. These deficiencies have since been corrected and the banks have been participating in the UP Agricultural Credit Project on a large scale. 89 ANNEX 3 Appendix 3 Page 12

Commercial Banks

Uttar Pradesh is served by 2,187 CB branches of which nearly 928 branches are in the rural areas. The main problem of CB relates to the paucity of trained staff, inadequate branch network in rural areas, and lack of coordination with Government Departments. The RBI branch licensing policy lays stress on CB extending their branch network. With the advent of the UP Agricultural Credit Project where CB have been given a sizeable program, some of the banks have made notable progress in the recruitment of specialized staff with a view to expanding agricultural credit. The State has also enacted legislation giving effect to the recommendations of the Talwar Com- mittee. Six regional banks are functioning in the State, and four more are likely to be set up soon. The institutional credit system is strong for the 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 expansion program 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 extension of institutional credit for agriculture. Other bottlenecks relate to heavy overdues of cooperatives, the lack of ownership rights on cultivated land, non-availability of trained personnel and inadequate extension support from the State Government. The agricultural extension service in the State has been recently reorganized and the system is reported to be working very satisfactorily. This will give momentum for institutional lending for agriculture. One of the notable features in 1975-76 has been the recovery performance of PLDB; 22 PLDB out of a total of 26 are now eligible for unrestricted lending.

North-Eastern States

(xvi) Assam

Short Term Cooperative Credit Structure

The short term cooperative credit structure in Assam consists of the Apex Cooperative Bank and seven DCCB at district level. The system is very 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 of essential commodities and the agricultural loans advanced by them are only for financing high yielding seed varieties. An action program suggested by RBI for recoveries has not been fully implemented. All the DCCB are weak and dormant.

90 ANNEX 3 Appendix 3 Page 13

Long Term Cooperative Credit Structure

The long term credit structure is federal with 16 PLDB affiliated to the Apex bank. The structure has been beset with the same problems as the short term credit stucture, viz., poor operational efficency and low recovery performance.

Commercial Banks

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

Problems Common to Banks

Much remains to be done in the State with regard to updating of land records, exempting CB from the provisions of Assam Fixation of Ceiling of Land Holdings Act 1956, and increasing the number of notified towns where equitable mortgages can be created. Transport bottlenecks and poor extension services have also contributed to the poor development of the region. Land records are 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 departments in the formulation of agricultural development schemes as well as in their implementation. In North Cacher Hills and Mikhir Hills districts were tribals predominate, the tribals have no alienable rights over lands cultivated by them. The IDA Eastern Region Foodgrains Project covers the State of Assam and a detailed study on the institutional system has been completed by ARDC. Based on the findings of the study team, an action bound program to revitalize the institutional system in the State would emerge.

Other Northern States

As in Assam, the north eastern region comprising the States of Manipur, Nagaland, Arunachal Pradesh and Tripura have been beset with iden- tical problems viz., weak cooperative credit structure and inadequate coverage by CB branches. The RBI branch licensing policy has been stressing the need for opening more branches in the backward regions of the country including those in the north eastern region. Consequently, there has been gradual increase in the number of CB branches in these regions. One of the problems in this region that is retarding institutional credit for agriculture is the prevalence of Jhumming (shifting cultivation). Another relates to the land tenure system. In some areas of this region, lands are under the control of village level councils who allot them for Jhumming purposes. Lack of mortgage rights in respect of these lands has been the pressing difficulty. Lack of communications is also hindering the progress of agricultural credit. It has been the endeavor of ARDC as well as the various agencies to penetrate into

91 ANNEX 3 Appendix 3 Page 14 this region. ARDC had conducted pre-investment surveys and has been encouraging CB to take up schemes on the basis of these studies and avail itself of refinance facilities. In this region, institutional credit is bound to be slow, but of late some progress has been discernable in some parts, such as Manipur, Tripura and Nagaland.

Source: Agricultural Refinance and Development Corporation.

92 ANNEX 3 Appendix 4 Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Interest Rates in India

INTRODUCTION, SUMMARY AND CONCLUSIONS

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

2. A survey of the economy-wide issues confirms the complexity of the detailed analysis required to justify changes in specific interest rates in India. To treat adequately the complicated term structure of interest rates in India, the inter-sectoral variations in rates, and the definition and adequacy of "real" rates is a major undertaking that has not been attempted. However, initial consideration of these factors does seem to indicate that none presently pose serious problems for the functioning of the Indian economy. Furthermore, marginal changes in interest rates are likely to have very little impact on the overall allocation of investable funds in India with its large public and joint sectors in which direct allocations of investment predominate. Therefore, in the context of this project it is recommended that the Bank not get involved in questions relating to India's overall interest rate structure.

3. The micro or project-related issues revolve around: (i) the long term viability of rural lending institutions, specifically, the Land Develop- ment Banks (LDB); and (ii) the determination of appropriate rates of interest for farmers. Institutional viability depends on the spread between borrowing and lending rates relative to the administrative costs of the institution. The future viability of the institutions can be directly anticipated from the relation between the marginal and average spread. On the basis of the best available evidence for LDB in India, the marginal spread is less than the average spread, which implies that some adjustment in the lending rate must eventually be made if LDB are to remain financially independent. Although not the preferred alternative, this objective could also be met through State Government financial guarantees to the LDB, directly or indirectly reducing their cost of funds. No conclusions are reached here concerning the socially optimal allocation of administrative expenditures, but conformity to a single

93 ANNEX 3 Appendix 4 Page 2 agreed standard is desirable in order to establish a firm criteria of viability. A movement toward lending rate uniformity between LDB and CB also appears justifiei. Consequently, it is recommended that GOI and ARDC complete a study of the project-related issues and implement suitable corrective measures.

ECONOMY-WIDE ISSUES

4. The economy-wide issues focus on the role of interest rates in resource mobilization and allocation, specifically the objectives of GOI interest rate policy and its effect on Government borrowing, inter-sectoral resource allocation, and the distribution of income. These issues must be considered in the context of the real level of interest rates, taking into account price inflation. Finally, one must consider the practical importance of interest rates, in terms of the actual proportion of investable resources which 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 interest rate may be considered as the sum of three parts: (i) the economic rate of interest which reflects factors associated with the inter-temporal allocation of real resources; (ii) a general appreciation factor which adjusts for actual or anticipated changes in the value of the investment instrument due to changes in interest rates or general inflation; and (iii) a risk premium which com- pensates the lender for the likelihood of default or difficulty of obtaining repayment of either interest or principal. The allocative functions of the interest rate are to elicit correspondence between planned saving and investment in the economy, and to provide a criterion for the minimum acceptable productivity of investment opportunities. As the price of capital, the interest rate also helps to determine the functional and personal distribution of income. Especially apropos to the Indian context is the general proposi- tion that in an economy with given distortions, either in product or factor markets, 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 identified above but also other, often mutually inconsistent, objectives of the Government. For example, though interest on national debt only represents the nation's future obligation to itself, there are understandable budgetary reasons why the Government would wish to minimize the cost of Government borrowing (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 of 5.0 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 may reflect an a priori judgement that one sector ought to be more capital intensive than another. In India there is little inter-sectoral distortion, as 94 ANNEX 3 Appendix 4 Page 3 the differentials between rates charged by institutions lending primarily to agriculture and those leading primarily to industry are insignificant. ICICI and 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 announced modernization program for industry will make US$1.6 billion available for approved schemes at concessional rates of 7.5%.

8. A third objective of GOI interest rate policy seems to be the transfer of resources to favored target groups. For example, small businesses, exporters, and small farmers all benefit from apparently subsidized credit for some, though not all, types of borrowing: the ceiling of SFC loans to small enterprises is 11% as opposed to the normal ceiling of 14.5%, and export credit on deferred payments may be obtained at 8%. To the extent this procedure reflects a desire simply to transfer income, subsidized interest rates are a dubious instrument. However, such subsidies may also reflect a perception on the part of Government that social returns to investment exceed private returns for such groups, so that at the "market" rate of interest insufficient investment occurs. This is a theoretically valid argument but obviously subject to case by case verification.

9. Finally, variations in the interest rate structure may reflect inter-sectoral differences in the rates required to mobilize savings. How- ever, rigidities on the savings side do not, in a reasonably integrated economy such as India's, imply that sector lending rates should correspond to sector borrowing rates. Specifically the issuing of special "rural development" debentures at 12% to mobilize "rural" savings does not imply that agricultural lending should earn a margin on that particular rate in isolation from lending and borrowing rates in other sectors.

10. Adjustment for Inflation. The consequences of this interest rate structure are further complicated by the relation between the pure economic rate of return and the appreciation factor increases. If the pure or real economic rate of return is to retain any allocative role then nominal interest rates must increase by the extent of the appreciation factor (which, unfortunately, is not generally equivalent to short-run changes of any particular price index). Determining the true "real" rate of interest thus becomes a treacherous exercise. It is, nonetheless, important and some indication being more valuable than none, one may compare the short term bank deposit rates adjusted for annual rates of wholesale price inflation to get some idea of the movement of nominal versus real rates of interest in India since 1970:

1/ These rates are those quoted in the Reserve Bank of India, Report on Currency and Finance, 1975-76. They are simplified for comparative purposes in that no distinction is made between local and foreign currency rates, the latter including an exchange risk element. Industrial loans financed by World Bank lending to DFC's suah as IDBI are made at somewhat different rates than those pertaining to the sector in general but still within a comparable range. 95 ANNEX 3 Appendix 4 Page 4

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 in 1975/76 have produced a pronounced shift in real short term rates. The current prospects for reasonable price stability are probably firm enough to assure that long term real rates (which are nominally higher) have moved in a similar direction. Thus, the current structure of real interest rates in India seems to reflect a reasonable notion of the opportunity costs of capital.

11. The Allocative Domain of Interest Rates in India. Leaving aside the multiple objectives of interest rate policies and the present adequacy of "real" rates, one should consider, in the Indian context, the importance of interest rates as allocative mechanisms. Of total net savings in financial assets 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 household sector. Between 1960/61 and 1972/73, savings from the domestic corporate sector grew slowly at an average of 4.7% p.a. followed by public savings at 13.5% p.a. and household net savings at 16.7% p.a. 1/ While the share of public savings is significant and does limit the domain over which interest rates might be expected to affect resource mobilization, the role of the public sector in investment allocation is even greater. A back-of-the envelope calculation of gross capital formation in industry and trade in 1974/75 indicates that capital formation of commercial undertakings from central government sources considerably exceeded the amounts raised through capital issues or loans from banks or other important lending institutions. 2/ Thus the actual allocation of investment funds is influenced greatly by direct Govern- ment allocations in which the market clearing function of interest rates is obviated by bureaucratic decision-making. The operation of the industrial licensing system and the effective rationing of credit through administrative procedures 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 formation to commercial enterprises (presumably public or joint undertakings) in 1974/75 and an estimate of private capital formation on the basis of capital issues, loans from banks, public debentures, and loans from other term lending institutions (ICICI, IDBI, IFCI, etc.). The latter is an overestimate of the private share since some of the funds from these institutions are lent to public or joint enterprises. 96 ANNEX 3 Appendix 4 Page 5

CONCLUSION ON ECONOMY-WIDE ISSUES

12. The structure and level of interest rates in the Indian economy are neither so greatly out of line with reality nor do they have sufficient impact on resource allocation as to warrant considerable effort at fine tuning.

PROJECT-RELATED ISSUES

13. Moving to the specific issues directly related to the second ARDC Credit project does not, unfortunately, reduce the complexity or tractability of the problems. The major issue is the viability and quality of the institutions affected by the project, namely the ARDC and LDB. Subsidiary to this issue is the question of the efficient incidence of administrative costs in agricultural credit operations. When these costs vary systematically between classes of borrowers (e.g. higher costs of lending for small-versus large- scale farmers), the issue is further complicated by the cross-subsidization implicit in a uniform lending rate. A final issue is the dispersion of interest rates among different institutions engaging in long term lending in agriculture.

DISCUSSION OF PROJECT-RELATED ISSUES

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

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

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

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

97 ANNEX 3 Appendix 4 Page 6 this percentage will grow in the future. Ordinary SLDB debentures are subscribed by both institutional and non-institutional sources. State governments, which have legal control over the SLDB, guarantee both types of debentures and also subscribe themselves to the 'special development' debentures. The remaining 20% of ARDC disbursements are made to CB, but constitute a small portion of the funds for agricultural lending raised by these banks.

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 ARDC financial position is indicated by these figures. The SLDB appear to be in a slightly different position. The marginal spread on current lending is figured at 3% to 3.5% with the current cost of funds at 7.5% and lending rates 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 funds to generate high income on fixed deposits gives an average spread for the SLDB from 5.5% to 6.0%. 2/ The implications of continued divergence between average and marginal spreads is an inevitable decline in SLDB profitability. However, such an outcome would be at the discretion of the State Governments which could take up SLDB debentures at rates low enough again to reduce the marginal cost of funds to the SLDB should their financial viability ever be threatened. 3/

17. The adequacy of the LDB spread also hinges on the magnitude of appropriate administrative charges to be borne by the lending institution. Datey estimates an 8% interest premium on this account but the derivation of 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 ratio of supervisors to the volume of new and old loans and about the cost of providing technical services now either paid for by Government or not provided at all. 4/ Datey then adds this to "the effective margin which the SLDB will have to maintain." This latter he estimates without elaboration at 4.5%. As the 3.5% already includes a significant portion of overhead (0.8%) and all salaries (2.7%) it is unclear what administrative purpose the "effective margin" of 4.5% serves. Without further investigation it is difficult to

1/ Datey, C.D. ibid., Table 16. A comprehensive assessment of the ARDC financial position made by the appraisal mission indicates somewhat lower 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 financed by IDA/Bank in which SFC on-lending rates are lower than to medium-scale industry while the financial spreads are larger on small-scale lending due to concessional GOI terms to SFC's for small-scale lending (through IDBI).

4/ Datey, C.D., op. cit., Annex VIII, p. 5. 98 ANNEX 3 Appendix 4 Page 7 assess exactly what spread a full accounting of administrative expenditures would entail.

18. The Determination of Who Should Bear Administrative Costs. More fundamentally there may be sound economic reasons for not applying the full administrative spread. If there is a divergence between social and private benefits to investment in agriculture, due for example to risk aversion on the part of farmers, then a divergence in social and private costs may be justified to generate the socially desirable level of investment. This divergence in costs might be accomplished through explicit subsidization but more plausibly by the public provision of services, such as extension and project supervision, that serve to reduce the risks involved. It is by no means clear then that efficiency is served by shifting these costs of agriculture credit onto the borrower.

19. Cost Differentials for Different Classes of Borrowers. Cross- subsidization among lenders occurs whenever a single lending rate is used to cover the average costs of lending to different classes of borrowers although there are identifiable administrative cost differentials associated with the different groups. In the case of India, Datey estimates that an extra 1% interest premium is needed to cover the added cost of lending to small farmers. This presumably covers both the extra risk premium associated with the higher probability of overdues and default by small farmers and the added costs of processing the increased number of loans which a higher proportion of small-farmer lending would generate. However, it is not clear whether the 1% spread represents the average increase needed or the marginal increase to be charged solely to small farmers.

20. The same analytical difficulties apply to small farmer cost differentials as apply to administrative costs in general. To the extent that private and social benefits diverge for reasons peculiar to small farm lending, there is a case for explicit subsidization to equalize lending rates between smail and large farmers. In its policy statement on agricultural credit, the Bank advocates a uniform lending rate in order to: avoid the leakages and opportunities for corruption that might stem from differential rates. In addition uniform interest rates would help foster optimal resource allocation. 1/

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

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

99 ANNEX 3 Appendix 4 Page 8 which it is estimated that average interest costs equal 7.07%. 1/ This is approximately the same as the cost of funds from ARDC. Banks currently charge 14%-16% for non-ARDC agricultural loans. Data on average -.terest income from all agricultural loans outstanding is not readily available, but the average spread for rural commercial banks is unlikely to be less than 6%-8% with a marginal spread at the upper end of this range. This appears to exceed the average LDB spread slightly and is considerably greater than the marginal LDB spread. Again it is difficult to assess the adequacy of this margin, but one may note that Datey's estimate of the administrative costs of agricultural lending for CB is 6.0%. 2/ At any rate, comparability of the spread between LDB and CB bears less on efficiency issues than on the inequity 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 to few unequivocal recommendations. Without normative judgment on the ratio of social to private benefits from agricultural credit, one cannot determine which administrative costs should be passed on to different or all classes of borrowers. Whatever administrative costs are found legitimate should, however, be made explicit and all institutions in the sector should be expected to cover these costs in both the short and long-run. This dictum would seem to require some widening of the current marginal spread for LDB. On allocative grounds, narrowing of the differential between LDB and CB long term 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 rates would facilitate both these objectives. Possibilities for narrowing the existing differential could be usefully discussed during negotiations for the 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 borrowing and lending rates in relation to long term objectives for agricultural lending institutions and that based on this study appropriate adjustments be undertaken to achieve these objectives.

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

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

100 ANNEX 3 Table 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT 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 the year plus overdues from previous years). 2/ Provisional.

101

September 1976 ANNEX 3 Table 2

INDIA SECONDAGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

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 9.2 Primaries 11.2 19.6 23.3 23.3 14.7 Assam SLDB 60.0 71.4 62.3 74.4 43.5 Primaries 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 Nil Primaries 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 30.0 Primaries 43.0 42.0 39.3 42.1 41.9 Kerala SLDB 26.6 27.5 39.2 35.7 9.5 Primaries 33.3 34.4 45.8 32.0 20.7 Madhya Pradesh SLDB 37.2 20.6 39.5 32.3 22.5 Primaries 48.7 38.3 50.1 50.3 35.5 Maharashtra SLDB 32.1 83.3 44.5 56.2 59.4 Primaries 39.2 - 3/ - 3/ - 3/ - 3/ Orissa SLDB 24.1 42.2 50.8 58.5 N/A Primaries 54.7 48.9 54.2 62.6 30.8 Punjab SLDB Nil N/A 7.2 1.9 2.7 Primaries 2.7 10.8 11.5 14.0 15.2 Rajasthan SLDB 32.4 47.9 50.6 47.4 20.4 Primaries 47.4 47.9 48.7 40.0 25.8 Tamil Nadu SLDB 2.2 5.7 5.1 12.9 17.7 Primaries 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 Nil Primaries 64.0 N/A 43.8 31.3 13.5

1/ Expressed as a percentage of demand (princiDal and interest falling due during the 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 4 Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Agricultural Refinance and Development Corporation

Background

1. The Agricultural Refinance Corporation (ARC) was set up by an Act of Parliament and began operations on July 1, 1963 after comprehensive studies revealed that institutional credit, particularly for term financing of investment in agriculture, was inadequate. Subsequent amendments in the Act made several significant changes and included changing the name of the Corporation to the Agricultural Refinance and Development Corporation (ARDC). The Act provides for the scope of ARDC activities, the principles guiding its activities, and organizational matters.

Functions

2. The ARDC has engaged itself in the task of enlarging term credit available for agricultural investments, improving lending quality at all levels, rationalizing lending policies and procedures in order to gear up for production-oriented lending, removing of disparities between different regions in the country in regard to long-term agricultural investments, and promoting small farmer interests and other under-privileged sections of the rural society. The ARDC not only serves as a refinancing agency providing long-term accommodation to agricultural credit projects, but also stimulates interest of State government authorities and credit agencies in agricultural development schemes by helping to formulate and implement schemes.

3. MIainly, ARDC can refinance: (a) planned schemes of minor irrigation works covering compact areas; (b) reclamation and preparation of land for irrigation under command of surface irrigation projects; (c) forestry development; (d) soil conservation and mechanization of farming; (e) production of plantation crops; (f) construction of warehouses; and (g) diversified agricultural schemes.

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

103 ANNEX 4 Page 2

Share Capital and Resources

5. Recent amendments in the Act, (proposed under ARDC I), increased authorized share capital from Rs 250 M to Rs 1,000 M. Share cap!tal can now be increased by RBI with previous approval of GOI. At the close of the fiscal year June 30, 1976, share capital issued and outstanding stood at Rs 250 M. Current share holdings are: (a) RBI 14,126 (56.5%); (b) SLDB and SCB 6,428 (25.7%); scheduled commercial banks 4,131 (16.5%) and others 315 (1.3%). The initial share capital of Rs 50 M carried a GOI guaranteed annual dividend of 4.25%. There is also Rs 100 M share capital with a dividend 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) borrowings from GOI and from any entity approved by GOI; (b) issue and sale of debentures and bonds guaranteed by GOI; (c) borrowings frum RBI; and (d) deposits from GOI, State governments and local authorities. Maximum borrowing is limited to 20 times its paid up capital and reserves. The ARDC Act provides that RBI may deposit with ARDC for 15 years, interest free, dividends accruing on its shares, which further increases resources available 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 15 years. The ARDC average borrowings and lending rates for the years 1963-64 to 1975-76 are shown in Table 1 and an analysis of the ARDC interest rate structure is in Table 2.

8. The ARDC Board of Directors is comprised of nine members: the Chairman, who is a Deputy Governor of RBI and nominated by it; one other nominated 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 director appointed by RBI after consultation with the Board. The present Board Members are listed in Table 3.

Management

9. The managing director is Chief Executive Officer and is responsible for the day to day operations of ARDC. He is assisted by a deputy managing director, who was recently appointed, and three senior directors. The Board of Directors has authorized the managing director to approve refinance for schemes up to a limit of Rs 5 million per scheme. This power is exercised by the managing director with the help of a management committee consisting of 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 continuity of staff as staff members can be transferred back to RBI at any time.

104 ANNEX 4 Page 3

However, this has not created any significant problems since such transfers have not been frequent. This close relationship with RBI also has certain advantages. Recruitment is no problem, staff are transferred from RBI when required and no staff member is transferred until he has received banking 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 has established technical units at the head office, Calcutta, and Lucknow. These units have specialists in groundwater and hydrology, soil conservation and water management, animal husbandry, fisheries, and plantation production. They not only provide technical advice to ARDC but also to lending institutions. They also assist States in identifying viable projects and help lending institutions and State governments in project formulation and implementation. The ARDC recognizes the need to upgrade and increase its staff at all levels. Staff projection estimates through 1980 are shown in Table 4.

Organization

12. Overall organization of ARDC is shown in Table 5. Recently, a deputy managing director was appointed but his specific duties have not yet been identified. The head office is in Bombay and there are 15 regional offices covering all the States. The new organizational structure consists of eight Departments: Projects Division I, Projects Division II, Projects Division III, Management, Planning and Development, Technical, Evaluation and Programming and Training.

13. Projects Divisions are headed by senior directors with States operations divided among them. Subdivisions within each Project Division are headed by directors. The number of States each director is responsible for is kept small to enable concentration upon schemes within the State. Projects Divisions receive proposed schemes, scrutinize them, arrange for technical and financial studies wherever necessary, prepare a memorandum to the 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 regional offices 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 ARDC accounts. This section supervises ARDC fund positions and mobilizes resources for lending programs. In this regard, the section arranges periodic market borrowings through sale of bonds, and arranges to borrow funds from GOI including reimbursement under IDA credits. In addition, the section arranges for resources from the National Agricultural Credit Fund set up in RBI, as well as for short-term borrowings from RBI. Excess funds not immediately required are invested in Government securities. The section is also responsible for preparation of ARDC financial reports. 105 ANNEX 4 Page 4

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

17. Board Matters, such as circulating agenda papers for board meetings and 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 provides management information on: systems; performance budgeting; monthly progress reports: annual reports; IDA matters other than accounts, and replies to Parlinmentary questions. It is also responsible for program planning, method2 of appraisal, surveys and studies.

19. The Te-rinicalDivision 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 recommendations as deemed advisable.

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

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

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

Lending Policies

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

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

106 ANNEX 4 Page 5

25. Schemes must be technically feasible and financially viable. They should include provision for credit, technical services, working capital or seasonal credit and marketing. The ARDC technical staff reviews and evaluates each scheme. Consideration is given to financial evaluations including cost estimates, 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 to five years) and long-term loans (up to 15 years) for approved schemes. This is in line with the identified need for more term credit for investment in agriculture. Refinance is provided by subscriptions to special debentures issued by the SLDB or by loans to SCB and CB.

27. Normally, ARDC subscribes up to 75% of debentures leaving the remaining 25% to be met by respective State governments. Beginning in 1967/ 68, ARDC provided refinancing up to 90% in the case of minor irrigation as an incentive to various State governments and to relieve their financial burden. 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 refinanced at the rate of about 75% by ARDC, except for financial institutions operating in lesser developed eastern and in the north eastern regions. In these regions, ARDC is providing 90% refinancing uniformly irrespective of the purpose. This concession has been made to encourage financing institutions 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 aegis of SFDA/MFAL agencies. From that date, refinancing has been provided up to 90% with the remaining 10% by concerned State governments in respect to schemes 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 debentures were repayable in one lump sum at the end of the loan period and ARDC required that collections from farmers in the interim be placed in a sinking fund. In the case of IDA-supported projects, ARDC is given the benefit of the re-use of funds realized from farmers' collections. Repayments of such special debentures under IDA projects are, therefore, scheduled approximately to 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 ARDC Act enables ARDC to grant credit for working capital or seasonal requirements, such credit would be confined to integrated schemes. Split lines of credit are 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 4 Page 6 though they may be adequately secured. It is more difficult to work with the borrower in arranging revised or rescheduled loan repayments when this becomes necessary if more than one lender is involved. The Committee, which was appointed in accordance with the terms of ARDC I, to look into the possibility of a merger of the two cooperative credit structures has strongly recommended such a merger. The GOI is expected to make a decision on the Committee's recommendations during the next fewrmonths.

32. Currently, ARDC is lending at 7.5% on minor irrigation schemes and 8.0% on other schemes. On-lending institutions charge farmers a minimum of 10.5% and 11.0%, respectively. All lending institutions operating a particular scheme must charge the same rate of interest. This spread to participating banks is barely adequate, particularly if LDBs are to be strengthened by recruiting staff on direct establishment (Annex 3), and RBI and ARDC should review their lending terms with a view to increasing the spread. An increase in lending rates of about 1% to 2% to farmers would bring agricultural financing through ARDC more in line with comparable loans not refinanced by ARDC.

Lending Commitments

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

No. of Disbursement schemes ARDC Commitment as as percentage sanctioned phased Disbursement of commitment at 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 10.1 1965-66 36 82.8 87.3 44.5 49.0 53.7 56.1 1966-67 42 94.0 143.0 20.8 69.8 22.1 48.8 1967-68 128 185.0 254.8 56.7 126.5 30.6 49.6 1968-69 233 459.4 585.9 178.4 304.9 38.8 52.0 1969-70 371 616.6 921.5 286.0 590.9 46.4 64.1 1970-71 458 665.8 ]L,256.7 306.2 897.1 46.0 71.4 1971-72 711 863.3 1,760.4 349.8 1,246.9 40.5 70.8 1972-73 923 1,667.1 2,914.0 941.4 2,188.3 56.5 75.1 1973-74 1,457 1,882.0 4,355.6 978.4 3,166.7 52.0 72.7 1974-75 2,053 1,875.4 6,087.3 1,064.0 4,230.7 56.8 69.5 1975-76 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 a total of Rs 5,357.7 (Table 6).

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

108 ANNEX 4 Page 7 building its staff. The above Table shows the significant growth that has taken place in recent years. Most of the earlier schemes sanctioned were financed by LDB. However, during the last two years, CBs have become more significant in the field of agricultural financing and use of ARDC facilities.

ARDC Schemes Sanctioned During 1975/76

ARDC Commitments Schemes Approved Total Average Number % per scheme Rs M % Rs M

(a) Land Development Banks 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 Commitments Average Schemes Approved Total per scheme Purpose 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 estimates but 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's more frequent recourse to imposing commitment fees. As of June 30, 1976, disbursements were 70.1% of scheduled commitments (para 33). Purpose-wise disbursements by ARDC since inception are shown in Table 7.

Source of Funds

37. (a) Share Capital: The borrowing power of ARDC is restricted to 20 times paid-up capital and reserve funds. As of June 30, 1976, its issued and paid-up capital was Rs 250 M and shareholders were as follows:

Institution Shares Held June 30, 1976 Rs M %

Reserve Bank of India 141.3 56.5 Central Land Development Banks 43.7 17.5 State Cooperative Banks 20.6 8.2 Scheduled Commercial Banks 41.3 16.5 Life Insurance Corporation of India 2.9 1.2 Other Insurance and Investments Companies 0.2 0.1 250.0 100.0

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

(b) Borrowings from GOI: Borrowings from GOI, which are at present limited to rupee equivalent of disbursements made under 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 in recent years to mobilize local resources and to help finance its growing business. The growth of local resources mobilization is shown in Table 8. During 1975/76, ARDC issued the IX and X series of bonds for an aggregate sum of Rs 385 M. These issues which mature in ten years carry an interest rate of 6% per annum. At June 30, 1976, ARDC total market borrowings were Rs 1,377 M. The following Table shows the amounts outstanding as well as the subscribers for bond issues:

110 ANNEX 4 Page 9

Bond Series Subscribers I - VIII IX X Total ------(Rs M)------State Bank of India and Subsidiaries 227.5 15.4 48.6 291.5 Nationalized banks 444.6 42.5 78.5 565.6 Other Commercial Banks 61.3 10.6 15.4 87.3 Life Insurance Corpora- tion of India 9.5 1.0 2.5 13.0 Other Insurance and Investment Companies 2.1 2.5 5.0 9.6 Cooperative Banks 239.1 38.0 125.0 402.1 Other 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 M under the National Agricultural Credit (Long-term Operations) Fund and this limit was fully utilized. In June 1976, when there was a considerable step-up of ARDC disbursements, RBI granted a supplemental limit of Rs 200 M which was fully utilized. Repayments on earlier loans were Rs 98 M.

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

(f) Repayments by the Member Banks: During 1975-76, repayments by member banks amounted to Rs 245.9 M. The following Table shows the breakdown by agencies for aggregate repayment of Rs 448 M as of June 30, 1976:

Repayments IDA Assisted Agency ARDC Schemes Total ------(Rs M)------

Scheduled Commercial Banks 135.2 26.6 161.8 State Land Development Banks 75.6 162.5 238.1 State 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 years June 30, 1972 through June 30, 1976, is given in Table 9 and is summarized below:

111 ANNEX 4 Page 10

Operating Results

Profit Trf. to Profit Gross Total Before Special After Net Year Income Expenses Taxes Reserve Tax Tax Dividend Surplus 1971-72 60.6 49.7 10.9 1.1 5.8 4.0 3.0 1.0 1972-73 92.4 75.4 17.0 1.7 8.9 6.4 4.4 2.0 1973-74 155.3 124.4 30.9 3.1 16.0 11.8 6.7 5.1 1974-75 221.4 177.3 44.1 4.5 23.0 16.6 8.9 7.7 1975-76 299.1 240.6 58.5 5.9 30.9 21.7 10.9 10.8

39. Operations have improved during each of the past five years as volume of lending has increased. Profit level has increased satisfactorily and is expected to remain good in the years ahead. The ARDC does not set aside any reserve for losses on bad debts, and management is of the opinion that is not necessary in view of the type of lending activities, the type of security behind the loans, guarantees of State governments, and agreements with RBI and CB which permit ARDC to draw against their deposits with RBI should a CB not repay ARDC as scheduled. The ARDC has no overdues, nevertheless, it would be prudent to keep the question of creating a reserve for bad and doubtful debts under constant review.

Financial Position

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

Liabilities Assets (Rs M) (Rs M)

Paid-up share capital 250.0 Cash on hand 4.0 Reserve and surplus 44.0 IDA loans 535.0 Bonds and debentures 1,377.0 IDA debentures 2,483.0 Deposits 23.0 Other Loans 701.0 Loans from GOI 2,501.0 Other debentures 1,775.0 Loans from RBI 1,401.0 Interest accrued on loans and debentures 191.0 Other Liabilities 103.0 Other assets 10.0

Total 5,699.0 5,699.0

112 ANNEX 4 Page 11

Audit

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

March 1977

113 INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

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 interest free 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

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)

1971-72 1972-73 1973-74 1963-64 1964-65 1965-66 1966-67 1967-68 1968-69 1969-70 1970-71 Ant. Rete Ant. Rntc Ant. Rote At. Rate A=t. Rate At. -Rt A=t. Rate Ant, Rote A.t n RRtate A=ttAnt. Rate Aert. Rote t. Rate 1,064.0 7.5 1,711.5 7.S 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. Lendlee Rate* - 5.5 4.5 6.00 44.5 6.00 20.8 88

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

II Boerotina Rota (G) 0O1 Loans - - - 5.50 117.5 4.75 150.0 4.75 120.0 4.75 0.5 4.75 70.0 5.25 - - - (1) Noenal 50,0 30.0 69.0 5.25 40,0 5.25 1OR.O 5.75 70.0 5.25 31.1 4.75 335.9 4.75 124.0 4.75 98.7 4.75 204.0 4.75 (1i) IDA ______2.2 5.25 71.3 5.25 199.9 5.25 159.5 5.25 158.9 5.255 9.0 5.50 24.7 .595 29.4 5.50 26.6 5.75 37.0 5.75 50.9 5.75 11.2 6.0 19.4 6.0 87.6 6.50 2:5 7. 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~25 330.0 6.0 385.0 6.0 (b) Op.. H-k.LB-ing. _ _ _ _ 109.4 5.75 85.3 5.75 82.5 5.75 100.5 5.75 275.0 5.75 (4) Opec Markat Rorroowtega- _-______(c) BorroYnRfro= RenB9I - - 75.2 6.00 33.9 6.00 37.0 6.00 116.0 6.00 45.0 9.0 17.0 9.0 (1) Sho-t-ter-- 4.25 25.00 4.25 229.5 4.75 190.9 4.75 600.0 6.0 (it) L.ng-trr-50.0 50.R 4.75 390.90 6.800

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

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

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

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

(a) 0 roe-orreotnee GOorvraent of India:

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

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

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

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

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

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

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

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

(b) DeobentareR

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

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

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

Septeaber 30, 1976 INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Agricultural Refinance and Development Corporation

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 - Ministry of Agriculture and Irrigation, Department of Agriculture Nominated February 6, 1976 -

3. Shri I. J. Naidu Secretary to GOI - Ministry of 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 State Cooperative Land Development Bank Elected September 24, 1976 September 24, 1980

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

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

8. Dr. A. K. Banerji Executive Director - Agricultural Credit Department, Reserve Bank of India Nominated November 4, 1976

9. Shri M. A. Chidambaram. Managing Director - Agricultural Refinance and Development Corporation 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 /~~~~~~~~~~~~~~~~f1

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117 4' '0 _ '00,44 - ',4<044 <4 -0 44 g02 INDIA SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT Agricultural Refinance and Development Corporation Organization Chart

HEAD OFFICE

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

DIRECTOR DIECTOR IECO

[PROJECTS l l PROJECTS l | PROJECTS MANAGEMENT PLANNING PROJECTSPFiOJFCT PROJECTS AN..IEMENT ~~~~~~~~DEVELOPMNTPRGAMNAND EVALUATION DIVISION I DIVISION 11 DIVISION III DIVISION DIVISION DIVISIN C

RAJASTHAN PLANNING & DIRECTORUTTAR DIRECTOR---MA--ARA--TRA FUNDS& DEVELOPMENT MINOR PRADESH ~~~~~MADHYAODA ACCOUNTS & AAEET IRRIGATION DIETR EAUION DIETR TRAINING DIRECTOR PRADESH I

ORISSA PRADESE~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~OLCOSR DIRECTOR -- U-ARA- DIRECTOR TAMIL NADU DIRECTOR COMMITTEE & IAMTES DIRECTOR VATERNMAAG DIRECTOR RGAMN

RIRAR PONDAMERRY AEMT

PUNJAR KANTK

'A~~~~ AMI IKASHMIR .I

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

SREGIONAL OFFICES

N. E| STATES4 CENTRES

|COINSULTANCY UNITS

LUCKNOW CALCUTTA INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPCRATION CREDIT PROJECT

Agricultural Refinance and Development Corporation

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. of State 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 4 Table 7

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Agricultural Refinance and Development Corporation Purposewise Disbursements Since Inception (Rs M)

Up to During Up to 6/30 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

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

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

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT Agricultural Refinance and Development Corporation 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 99.0 132.1 154.0 191.3 219.0 249.2 283.8 322.0 Other 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 48.7 General 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 93.3 119.6 148.9 190.5 243.6 Transfer to Special Reserve 1.1 1.7 3.1 4.5 5.9 9.3 12.0 15.0 19.0 24.5 Tax 5.8 8.9 16.0 23.0 30.9 48.5 62.1 77.4 99.0 126.5 Profit After Tax 4.0 6.4 11.8 16.6 21.7 35.5 45.5 56.5 72.5 92.6 Dividend 3.0 4.4 6.7 8.9 10.9 15.9 20.6 23.6 28.4 34.6 Net 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

SECOND AGRICULTURALREFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT Agricultural Refinance and Development Corporation 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 20 IDA Loans - - 43 139 535 1,107 1,720 2,368 3,064 3,858 IDA Debentures 54 660 1,250 1,676 2,483 3,492 4,661 5,900 7,237 8,772 Other Loans 138 205 339 492 701 712 853 1,001 1,161 1,342 Other Debentures 1,043 1,296 1,465 1,756 1,775 2,081 2,288 2,502 2,730 2,990 Interest Accrued on Loans 3 3 8 15 33 Interest Accrued on Debentures 31 50 83 114 158 227 298 433 542 685 Other 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 Liabilities Bonds and Debentures 277 387 662 992 1,377 1,727 2,207 2,807 3,307 3,807 Deposits 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 550 650 Reserves 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 17,670 Capital - - -

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, 1976A 4- September 3, 1976 INDIA

SECOND AGRICULTURALREFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Agricultural Refinance and Development Corporation

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 1,641.0 RBI/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 92.7 245.9 310.0 470.0 600.0 780.0 830.0 Share 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 2,880.0 Non-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 m 4> 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

SECONDAGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT Agricultural Refinance and Development Corporation 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 1o4.4 108.2 165.0 227.2 294.0 Special Deposit - 01.1 02.4 o3.6 o4.9 o6.1 07.4 08.7 09.9 11.7 14.1 17.9 23.0 Subvention 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 1,377.1 Refinance 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 92.9 141.7 201.7 Investmentand 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 3.7 Gross Income 03.7 o4.o o4.3 05.0 o6.o 11.0 27.3 42.7 60.6 92.4 155.3 221.4 299.1 Profits 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 58.5 Tax 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 30.9 Profits 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 27.6 Dividend 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 5 Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Diversified Lending in Agriculture

Background

1. Agricultural production in India has increased during the last two decades at a rate of 2.8% per annum with foodgrain and non-foodgrain production expanding at about the same rate. Compared with previous decades, increases in productivity came largely from bigger yields rather than from increases in cultivated area (Table 1).

2. Increased productivity has largely resulted from expansion of irrigated area and greater use of high yielding varieties (HYV), of fertilizer and pesticides, (Table 2). In the period 1971/72 to 1975/76, gross irrigated area increased by 18% to 45.4 M ha, the area planted to HYV from 18.2 to 31.0 M ha (+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 accelerating production growth. Apart from enabling multiple cropping, it also reduces risk of crop failure due to drought and, therefore, encourages use of more inputs. Growth of gross irrigated area in recent years has been mainly due to accelerated groundwater development.

The Fifth Plan (1974/1979) and Diversified Lending

4. The Fifth Plan calls for rapid growth in cropped area in order to increase production (anticipating an expansion of over 2 M ha per year accompanied by an increase in the irrigated area of more than 11 M ha over the Plan period). This total cropped area should increase from 169 M to 180 M ha over the five year period. A major feature of the production program is the expanded involvement in agriculture of small, marginal, dry land farmers and farm laborers through Small Farmers Development Agencies and Drought Prone Area schemes. In humid areas of the northeast and Kerala and in similar climatic areas of the coastal belt and highlands, development of plantation and horticultural crops are to be given priority. These crops would serve the dual purpose of providing cash income and promoting soil conservation. Increased agricultural production is to be supported by strengthening administrative and extension services and by increasing and up-grading staff and facilities at State, District, block and village levels.

126 ANNEX 5 Page 2

5. The Fifth Plan also envisages a program of selective mechanization to complement other inputs for increasing cropping intensity and productivity. The present total level of energy available for agriculture production is only 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 as a result of increased mechanization.

6. The Fifth Plan also lays emphasis on development of plantation and fruit crops; particularly in high rainfall areas where irrigation is not required. A large portion of plantation crop development (coffee, tea, coconut, pepper and cardamon) would come from a rejuvenation program in areas where adequate water is already available either through rainfall and/or irrigation. Many of these crops, e.g. coffee, tea, rubber, cocoa, cardamon and pepper are important sources of foreign exchange, and some are supported by 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 substantial increase in the number of schemes sanctioned by ARDC for diversified lending. By the end of March 1976, ARDC had sanctioned schemes involving an aggregate commitment of Rs 206 M; more than necessary to fully utilize the IDA allocation for that purpose under the first general line of credit. The ARDC refinance of diversified lending, including non-IDA schemes, is expected to increase 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 agriculture is essential as in the course of time the scope for lending for minor irrigation develoments will decline in most States, thereby affecting the LDB volume of business. It has, therefore, been a deliberate objective of ARDC and RBI to impress upon LDB the need to diversify lending operations and the response from some has been favorable. The bulk of schemes for diversified lending have, however, come from commercial banks.

9. The ARDC has a Technical Division with its head office in Bombay and branches at Calcutta and Lucknow, and a national panel of technical experts employed as consultants for specific technical appraisals. The LDB and CB have been encouraged to establish their own technical units and such units are presently located in Gujarat, Maharashtra, Karnataka, Tamil Nadu and Uttar Pradesh. Most of the expertise for these units is in minor irrigation and land development. In addition, many technical publications are available from the Department of Agriculture, universities, colleges and private institutions and organizations, as guidelines for project formulation.

10. The ARDC and LDB rely heavily on technical staff of State governments 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 technical guidance 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 appraisals whenever necessary. In the case of crops such as tea, rubber, coffee, sericulture, etc., statutory boards have specialized experts who give advice and assistance before and after development. Due to the wide range u- diversified lending, the relatively small amounts to be disbursed in most States, and the scattered nature of most schemes, ARDC and LDB will continue to call upon outside assistance for development of guidelines for economic and technical appraisal of many projects.

Diversified Lending for Tree Crops

11. The national program for tree crop development is largely based on 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 ha with a production of 6,200 M nuts. Rehabilitation of coconut production is of prime importance if only to overcome the large and expanding gap between internal demand and present production. Production has suffered a severe setback due to widespread disease in Kerala and Goa, and a major effort is being made to control as well as eradicate disease and rehabilitate existing plantations. There is potential for increasing and expanding production in Karnataka, Gujarat, Tamil Nadu and Andhra Pradesh. Yield increases of 10 to 20% and more are readily achievable through the use of improved cultural practices; too many farmers look upon coconut as a secondary crop; it is planted on borders, along irrigation canals, etc., and given only casual care and attention. Farmers are, however, beginning to realize that coconuts can be successfully intercropped to provide a regular source of cash income. Inter-cropping is particularly attractive to farmers with relatively large holdings, enabling them to set aside part of their land for establishment of coconuts.

13. Although coconut is a good cash crop for the smallholder, his income suffers during the long gestation period. Consequently, GOI has recognized that promotion and establishment of plantation amd orchard crops on small holdings will often require a subsidy program such as has been proposed in Maharashtra under the SFDA scheme for the development of cashews, mangos, and coconuts.

14. Coconuts are normally planted on the lower flat land and require water for supplementary irrigation during the first two to three years; on a small scale, hand-watering is a common practice. Because of the traditional secondary nature of coconut cultivation, national average yields have been very low -- less than 25 nuts per tree. With a minimum of improved cultural practices, national average yields of 40 nuts per tree could easily be achieved. Cultivators in Karnataka growing coconuts as a primary crop obtain yields of 60 to 100 nuts per tree.

128 ANNEX 5 Page 4

15. Mango: Mango, like coconuts, are often grown as a secondary cash crop. Demand is good for both fresh and processed fruit throughout the country. Even in the absence of an organized marketing system, farmers have little difficulty in selling their crop. Prices have been steadily rising and, although ARDC and LDB have been using a price of Rs 15 to Rs 20 per 100 fruit 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 a stand of 100 to 150 trees per ha.

16. Mango is more attractive as a tree crop than coconut because more farmers are familiar with its care and maintenance, having planted trees in the 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. Deteriorating production and increasing demand have resulted in a sharp increase in prices. Disease resistant varieties are now available which make citrus production much more attractive, while marketing is better organized and packing houses and processing plants are being established.

19. Coffee: India produces over 90,000 tons of coffee annually of which about 60% is exported. There is a national effort to upgrade existing plantations and establish new ones, with emphasis on small growers (less than 4 ha). Karnataka leads in coffee production having more than 60% of the total of 0.4 M ha coffee under cultivation in India. Of the 85,000 ha of coffee in that State, about half is in holdings of less than 10 ha.

20. Indian coffee production has considerably increased during the past decade. 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 cultural practices -- in particular, use of irrigation and fertilizer. The national average yield of arabica and robusta coffee is about 500 kg per ha; yields of 700 to 800 kg are common on better managed plantations. A dramatic price increase has occured recently, both on internal and export markets. Demand is 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 is likely to continue. Production of these crops involves long term lending of 10 to 15 years with disbursement throughout the period to maturity. Generally, these crops require exacting growing conditions and thus are limited to selected areas. Cocoa, for example, requires a high rainfall distributed evenly throughout the year, a uniform high temperature and deep soils, which retain moisture. All of these tree crops; cocoa, rubber, tea, oil palm and cardamon require a high uniform rainfall but availability of moisture can be controlled by irrigation. Because of supplementary water requirements to

129 ANNEX 5 Page 5 produce these crops in many areas, it is recommended that cocoa be grown in suitable forest lands and intercropped with pepper and/or nutmeg.

22. Tea and rubber are regulated by statutory boards which also provide and arrange for finance. When refinance for these crops is requested from ARDC it always obtains a technical opinion as to suitability of soils, rainfall, temperatures, etc., in the project area.

Lending for Dairy and Poultry

23. There is a general lack of enthusiasm by lending institutions for small (backyard) dairy and poultry loans except as part of organized schemes where management and supervision are available. The CB experience so far has not been good, thus farmers and bankers approach any such programs with extreme caution.

24. Small scale unorganized dairying and poultry generally suffer from lack of management skills necessary to maintain healthy highly productive dairy cows or poultry. Native dairy stock only produce 500 to 600 liters of 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, has usually been unsatisfactory with annual production ranging from 150 to 200 eggs per bird; mortality rates are high and profits marginal at best. Laying flocks of 5,000 and more birds are becoming popular and the success rate is much higher as owners usually hire an experiencd farm manager; production of 220 eggs and more per bird are common.

26. There will be some scope for financing organized dairy and poultry schemes, but it will be slow to develop. Poultry has better prospects because of the trend in scale and the investment required in equipment, land and buildings. Small scale dairy, as often undertaken, requires minimal investment. Some farmers purchase crossbreed stock, but many small farmers simply use artificial insemination to upgrade existing stock. Thus credit is not generally a constraint on small scale dairy development.

Lending for Fisheries

27. Schemes for development of fisheries are normally of the integrated type involving catching or production of fish; processing and marketing, for both inland and offshore operations.

28. Inland fisheries schemes include development of ponds, repairing of tanks and ponds, reclamation of shallow waters for fish culture, equipment and facilities for raising fingerlings and rearing and harvesting fish. Processing and marketing facilities may be provided where required. The

130 ANNEX 5 Page 6 project area must be carefuly selected to provide suitable water for fish culture, together with adequate storage, transport and marketing facilities to make the operation profitable.

29. Offshore fishery schemes include fishing boats and their equipment, including motors, and nets. They may provide for storage, processing and marketing facilities as part of the project, if adequate facilities are not available.

Lending for Storage and Marketing

30. Schemes for development of storage and marketing usually include construction 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 units may be organized to act as marketing agents to purchase or store and market farmers' produce and inputs, and may include provision of transportation for the collection and distribution of produce and inputs as well as packaging, grading and marketing equipment. Their main function, however, is to provide safe and controlled storage facilities for farmers to enable them to take advantage of seasonal fluctutations in prices and to reduce losses during the holding period.

March 1977

131 ANNEX 5 Table 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Index Numbers of Area, Productivityand Production:1949-O') to 1975-76

Index of Per Area Productivity Production Capita Index* % Increase Index*% Increase Index* % InereasePtoduction

1949-50 82.1 89.8 72.8 100.0

1950-51 82.0 - 0.1 83.2 - 7.3 68.9 - 5.4 93.1 1951-52 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 96.9 1953-54 91.3 5.5 96.8 10.6 83.9 13.2 107.7 1954-55 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 - 0.5 104.3 1956-57 95.2 0.8 95.1 3.5 89.5 6.0 108.3 1957-58 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 15.4 112.1 1959-60 99.4 1.4 95.7 - 4.8 94.3 - 2.4 107.0 1960-61 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 0.3 111.9 1962-63 102.3 0.9 98.5 - 2.5 101.4 - 1.6 107.8 1963-64 102.1 - 0.2 100.8 2.3 103.9 2.5 108.1

1964-65 103.3 1.2 108.1 7.2 115.0 10.7 117.0 1965-66 100.9 - 2.3 92.2 -14.7 95.8 -16.7 95.3 1966-67 100.7 - 0.2 93.8 1.7 95.9 0.1 93.3

1967-68 105.0 4.3 111.5 18.9 116.6 21.6 111.1 1968-69 103.3 - 1.6 107.6 - 3.5 114.8 - 1.5 107.0 1969-70 106.2 2.8 112.7 4.7 122.5 6.7 111.7

1970-71 107.3 1.0 118.0 4.7 131.4 7.3 117.1 1971-72 106.7 - 0.6 117.3 - 0.6 130.9 - 0.4 114.3 1972-73 103.4 - 3.1 110.6 - 5.7 120.4 - 8.0 103.0

1973-74 109.4 5.8 117.1 5.9 133.4 10.8 111.8 1974-75 105.8 - 3.3 115.5 - 1.4 129.7(a)- 2.8 106.5 197 5-76(a) 107.1 1.2 129.6 12.2 147.4 13.6 118.8

Annual rate of increase (%) between the trienniaended

1951-52 and 1964-65 1.7 1.4 3.2 1.2 1964-65 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) Estimatedby the Center for Monitoring Indian Economy * Base: Triennium ending 1961-62 = 100. Source: Center for MonitoringIndian Economy,Basic Statisticsrelating to Indian Economy,Volume I: All India, October,1976.

January 28, 1977 132 ANNEX 5 Table 2

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

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 5 Table 3

INDIA

SECOND AGRICULTURALREFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Fertilizer Consumption in India (thousand tons of nutrients)

Year N P205 K20 Total

1952-53 58 5 3 66 1953-54 89 8 8 105 1954-55 95 15 11 121 1955-56 108 13 10 131

1956-57 123 16 15 154 1957-58 149 22 13 184 1958-59 172 30 22 224 1959-60 229 54 21 304 1960-61 212 53 29 294

1961-62 292 64 28 384 1962-63 360 81 36 478 1963-64 407 117 51 575 1964-65 435 148 70 653 1965-66 547 132 78 757

1966-67 839 249 116 1,204 1967-68 800 237 130 1,167 1968-69 1,131 389 154 1,674

1969-70 1,360 420 209 1,989 1970-71 1,487 462 228 2,177 1971-72 1,760 564 304 2,628 1972-73 1,779 587 333 2,699 1973-74 1,829 650 360 2,839

1974-75 1,774 478 339 2,591 1975-76 2,148 466 278 2,892

Source: Center for Monitoring Indian Economy, Basic Statisticsrelating to Indian Economy, Volume I: All India, October, 1976

January 28, 1977 134 ANNEX5 Table 4

INDIA

SECONDAGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

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 1951-52 Crop-/ and and and 1964-75 1975-76 1975-76

1. Rubber 7.4 12.0 9.5 2. Safflower - 9.2 - 3. Wheat 4.0 7.7 5.6 4. Potatoes 4.1 6.1 5.2 5. Ginger: dry 2.6 6.0 - 4.1 6. Ca&torseed - 0.9 -.9 1.7 7. Rapeseed and mustard 3.0 4.8 3.8 8. Coffee 6.8 4.0 5.5 9. Bajra 3.1 3.4 3.2 10. Nigerseed - 2.4 - 11. Tea 1.9 2.9 2.4 12. Cashewnuts - 2.7 - 13. Tobacco 2.3 2.7 2.5 14. Sugarcane: gur 3.5 2.5 3.1 15. Arecanuts _ 2.4 - 16. Maize 4.3 2.1 3.3 17. Linseed 1.3 2.0 1.6 18. Rice 3.6 1.8 2.7 19. Barley - 0.3 1.8 0.6 20. Guarseed - 1.8 -

21. Cottonseed 1.5 - 22. Coconut: copra - 1.4 - 23. Cotton: lint 5.1 1.3 2.4 24. Groundnut: in shell 4.0 1.0 2.6 25. Tur - 1.3 0.7 - 0.4 26. Ragi 4.3 0.3 1.8 27. O-her pulses 1.3 0.3 0.8 28. Chillies: dry 2.5 0.3 1.5 29. Jowar 2.8 - 0.1 1.6 30. Small millets 0.1 0.1 0.1 31. Bananas - 0.1 - 32. Pepper: black 1.1 - 0.2 0.5 33. Sesamum 0.9 - 0.5 0.3 34. Tumeric - -0.5 - 35. Jute 3.2 - 1.3 1.1 36. Mesta 7.6 - 2.0 3.1 37. Gram 2.6 - 2.2 0.4 38. Sannhemp - -3.3 -

Foodgrains 3.1 2.4 2.8 Non-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 period 1964-65 and 1975-76.

135 ANNEX 6 Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Training

I. Background

1. Because of ARDC's increase in volume of work, diversification of lending pattern, growing attention to small farmers' needs, and concentration on development in lesser developed States, it will place a great demand upon personnel of lending institutions at every level from headquarters to field staff. 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 staff capability.

2. For many years, considerable in-service training has been provided for staff of agricultural lending agencies. With establishment of the Project Planning and Appraisal Course (PPA) at the RBI College of Agricultural Banking (CAB) in 1972, training was spread even more widely, regularized, and was focused on modern methods of project appraisal advocated by IDA. In the first general line of credit to ARDC in April 1975 (ARDC I), was a triple approach to the problem covering the two years 1976 and 1977 including: (a) a training program for senior and middle level staff of certain types of credit institutions, centering on the Agricultural Projects Course (APC) which opened in September 1975 (US$200,000); (b) a study of the training needs of junior level staff of LDB only (US$200,000); and (c) design and execution of a program for training a substantial number of LDB junior staff in categories found by the study to need training (US$400,000). Details concerning CAB and training conducted by other institutions can be found in Annex 6 of the Appraisal Report of ARDC I (Report No. 562a-IN, March 15, 1975).

3. The project now proposed is designed to continue: (a) the senior and middle level in-service training which is currently well under way; and (b) the junior level in-service training which will have been half completed by the closing 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 LDB staff were to be trained at CAB by the closing date (December 31, 1977). The projected 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 136 ANNEX 6 Page 2 training by the closing date of ARDC I, only 630 will have received APC training and only 530 of these will have been trained in the normal four-week APC at CAB.

5. The content of the existing APC is essentially the same as it was when it opened in September 1975. At that time, it had the approval of EDI representatives, who had assisted in its design. It is similar to the earlier PPA course, which also had the benefit of EDI assistance and which imparted elements of modern appraisal methods (incremental benefit) to many LDB (and other) staff members for 1972-75. Adjustments in the overall curriculum of CAB 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 can be offered each year; this channel will be maintained at least through June 1978. Additional capacity has to be provided by introducing two-week APC in each of the six regions outside CAB, to accommodate trainees who could not be spared for the four-week period and, therefore, would otherwise receive no training in modern project appraisal. It is not yet possible to judge whether two weeks will provide an adequate substitute, but it was clear to CAB that an earlier experiment with a shorter course was unsatisfactory; after being offered once, it was discontinued and redesigned before being transformed into the two-week regional courses that are to begin in December 1976. The essential differences are:

(a) instead of compressing all subjects in the four-week course into a series too brief to afford an understanding of each, the least central subjects are omitted and the essentials treated in enough depth to be of value;

(b) the subject matter is focused on local crops and conditions rather than being more diversified; and

Other problems inherent in giving this course at a distance from the CAB will be mentioned in the discussion of ARDC II below.

6. The study of LDB junior staff training provided for under ARDC I was 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 LDB junior staff training program as rapidly as possible after IDA approval of the study's recommendations. The findings of the study have led to a reasonable balance between uniformity of basic programs and adaptation to local conditions, with ARDC in a financial position to influence decisively the size and content of local programs. By November 1976, ten SLDB had begun training

137 ANNEX 6 Page 3 programs of the type envisaged in the study and most of the other seven SLDB were currently preparing programs. The ten SLDB which had begun their training represented 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 centers and undertaken 18 courses under this program; these had given training to 550 junior staff. Only one of the larger SLDB had not yet begun training. All can be 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 senior officers 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 senior and middle level ARDC (318) and LDB (3,723) staff should have received training of the types conducted under ARDC I. Minimal training needs of CB and Regional Rural Banks (RRB) were roughly estimated at 2,000, RBI at 100, and State governments and public corporations at 500. Omitting SCB staff, which would not be included in the ARDC training program except on an incidental basis, the need comes to about 6,600, with LDB staff to receive priority attention. This excludes 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 received training, 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 closing 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 will eventually have to be mounted. Table 2 also shows that although the expectation is for 785 more SLDB staff to receive training by the closing date of this project, only 620 will have taken an APC and only 450 of these will have been trained 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 6 Page 4

Program for Training under this Project

12. Target numbers are of no value unless they can be attained with a good quality of training delivered and absorbed. A practical program has been 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, in both design and execution, from EDI over several years, beginning with its predecessor, the PPA course. By now it has had a substantial impact on the practice of credit appraisal throughout the country. The increase in the number of courses being given at CAB does not seem to affect the quality of the training in the short run, as faculty has been augmented to handle two simultaneous courses. In the long run, however, the lack of time for course evaluation and for preparation of new materials may be felt. Additional facilities have been approved which will enable CAB to expand, reinstituting certain standard courses that have been suspended to make rcoux for the increase in APC work and the new course for RRB staff. Three of the senior faculty, in addition to the Principal, have completed the EDI course. Course content of APC is considered by EDI to be suitable. Techniques of instruction could be modernized, but that is not essential and is not an element in this project.

14. Regional APC. The innovation in APC is the short regional course designed to transmit the essentials of modern appraisal in two weeks instead of four. These are designed and administered by ARDC rather than CAB, using one 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 on teaching technique, and certain elements of the four-week APO which are considered less applicable to the characteristics of the region. For example, of the six regional courses planned, the one for northeast wnuld emphasize plantations and horticulture, and the one for the central region would emphasize land development, command area development, and farm mechanization. The first of these courses is to take place in December 1976, with 15 more to be given by the end of 1979. Each would accommodate 35 participants, of whom about half would be SLDB staff. Only those who could not be spared for the four-week course at Poona and those who were more concerned with specific projects in the region, would be admitted to these regional short courses.

15. Trainees. The main constraint on expansion of SLDB participation in the APC (and therefore on increasing the number of APC) has been the availability of staff members as trainees. By increasing the number of courses during the "lean periods" only (July-November generally) and through proselyting activity by ARDC and CAB, earlier doubts have been modified. At the beginning of October 1976, there was a waiting list of 450 for the APC--200 of these from SLDB - and by late November the number had grown to 800 and 300, respectively. However, this is a list "in perpetuity", so that it is not a reliable reservoir assuring an adequate supply for any particular course. The standard problem (in any training program) of providing candidates who have adequate preparation and potential can be solved only by insisting upon training some of the best qualified staff first, to foster a habit of training those who will be the most useful in the future rather than those who can be spared most easily. 139 ANNEX 6 Page 5

16. Trainers. Faculty of CAB has been mentioned above. For the short regional APC, instructors will come on a visiting basis except for one coordinator. These would be mainly ARDC staff from headquarters and regional offices, who are considered to have adequate knowledge and experience in the subjects they will teach. Several are regular visitors to CAB courses and their ability is known. Others will have had virtually no teaching experience. Other visiting instructors will be drawn from CB, State government departments, and elsewhere, usually on a single-lecture basis. Many of the visiting instructors will have no opportunity to know the trainees they are instructing. Under such conditions, a great deal of any success achieved will depend upon the ingenuity of the course coordinator, who will be seconded from the CAB faculty, and as well, upon monitoring supplied by the Training Cell at ARDC headquarters (see para 18).

17. Facilities, Materials and Equipment. Physical facilities at CAB are very good and continually improving. Training materials and equipment are also improving and are adequate for teaching in traditional ways. For the short regional APC, facilities will be rented or borrowed, usually from an existing GB training college or center; there are many throughout the country that are more than adequate. These will include equipment, which, judging from a small sample, is likely in better colleges and centers to be about the same as that used at CAB. Training materials will be prepared by ARDC, in consultation with CAB. Many of the CAB materials will undoubtedly be used, but other items will have to be produced at ARDC headquarters. The Training Cell's director is fully aware of the difficulties and believes they can be overcome by existing staff.

18. Organization and Monitoring. Success will depend largely upon the work done by the ARDC Training Cell of eight professionals and one clerk located at headquarters in Bombay. This is headed currently by an experienced senior officer who was formerly Principal of CAB and is a graduate of EDI. His two deputies are also senior officers with relevant experience. The Cell reports directly to the Managing Director and will probably continue to do so under the forthcoming reorganization. These three members of the Cell plan to spend 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 at headquarters administering the program and helping to prepare training materials for regional APC and (mainly) the junior level training program. It is questionable whether under these conditions sufficient attention will be paid to training materials, but the director of the Cell is confident on this point and accepted the suggestion that the National Institute of Banking Management (NIBM) should be asked to assist to a greater extent than in the past.

140 ANNEX 6 Page 6

B. Junior Level Staff

19. The in-depth study conducted in 1975-76 by ARDC and SLDB of junior level staff training needs has provided figures for the following estimates and the basis for programs discussed below. ("Report on the Estimate of the LDB 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 and District offices, branches and PLDB) throughout the country, about 17,550 are categorized as junior level. It has been assumed that the number will remain substantially steady over the next few years and that for working purposes, this will be the number to receive initial training (disregarding both refresher training and turnover). All are considered to need specialized training planned under this program by the end of calendar 1979, regardless of 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 staff position, 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 junior staff. By the beginning of November 1976, about 550 staff members of nine LDBs, had already received training in the four-week courses approved by ARDC under this program. This is about 6% of the 8,800. The junior staff training proposals of 11 LDB have been approved by ARDC for financing. The entire program through calendar 1979, and the presumed closing date of this project, is as follows:

141 ANNEX 6 Page 7

Program for Training LDB Junior Staff

Trainees Trainees 1976 & 77 1978 & 79

Andhra Pradesh 1,606 625 Assam 40 14 Bihar 768 599 Gujarat 730 797 Haryana 285 253 Himachal Pradesh 56 63 Jammu & Kashmir 30 30 Karnataka 494 832 Kerala 107 216 Madhya Pradesh 638 905 Maharashtra 1,541 1,375 Orissa 156 235 Pondicherry 10 0 Punjab 304 506 Rajasthan 413 414 Tamil Nadu 768 941 Tripura 15 6 Uttar Pradesh 519 767 West Bengal 308 186

Total 8,788 8,764

Program for Training under this Project

22. General. After a sampling of job descriptions and qualifications of incumbents, an analysis of vertical and horizontal mobility, and an assessment of existing training arrangements, the ARDC study proposed a four-week analytical 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 the appropriate local languages. Each course will have about 30 participants; those LDB with fewer than 30 junior staff members will send them to a course at a neighboring SLDB.

23. Course Content. The core of each four-week course is to be appraisal and recovery methods under the project approach to lending (incremental benefit) as taught in the APC. However, their objective, and hence the treatment of the subjects, would be different from that of APC. Junior staff would not be expected to master the techniques, but would instead be made acquainted with the purpose and significance of those techniques and the terms and concepts used in the analysis. They would also be trained in methods of collecting information needed to enable middle and senior level officers to do project appraisals, so that all three levels would have the same understanding of what was to be done and why.

142 ANNEX 6 Page 8

24. Suitable syllabi have been worked out by ARDC (Appendix IX of the report cited in para 19), discussed with some of LDB and finalized as guidelines for LDB in designing their courses in such a way that ARDC can approve them for financing. The four-week duration will be uniform, even though SLDB preference during the study varied from two weeks to ten weeks. There will be three weeks of classroom and one week of field work.

25. Trainees. Availability of trainees is assured by several features of 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 during heavy recovery periods. Training will be in the local language. Trainees will not have to travel outside the State. Furthermore, a planned, regularized program will normally find a place in the total annual work program which a sporadic effort will not.

26. Quality of trainees cannot be assured, since all junior staff will be expected to participate and some are obviously more trainable than others. The half selected for training during the first two years will usually be the better qualified, as the more critical posts are scheduled to receive first attention. A better assessment of trainability can be made after experience with a few courses so that course content and method can be adjusted accordingly. This is the trial and error method, but anything more pedagogically sound would be too complicated for acceptance and execution. Trainees will have to be taken as they are, especially during the second two-year period, although experience with the training program may even have a beneficial effect upon future recruitment policy of LDB.

27. Trainers. Special effort will have to be exerted to provide good trainers, as the entire program in an LDB can fail at this point more easily than at any other. The ARDC recognizes this fact clearly and believes that the LDB agree. Each LDB has already designated two of its senior officers as trainers for each training center. They will prepare and organize courses and will devote full time to training during the training season. They will handle about half the instruction personnally; guest instructors from ARDC, ACD, other LDB, State government departments, and elsewhere, will handle the other half. Of the 48 trainers designated by October 1976, 22 were graduates of APC at CAB; another 12 were in APC during November. The CAB is giving priority to trainer-designees for admission to the next few APC.

28. The APC is not by itself sufficient to produce a good trainer out of an experienced officer; furthermore, not all the trainers will have an opportunity to attend APC before instructing. For these reasons, workshops for trainers are needed as soon as possible. One has already been held at the Staff Training College of RBI (Madras), organized and conducted by ARDC for 32 trainer-designees from 11 LDB. Instructors in this workshop were subject- matter specialists, including some experienced trainers, from ARDC, NIBM, and elsewhere. This one-week session emphasized practical exercises in course design and programming rather than techniques of classroom presentation. Some

143 ANNEX 6 Page 9 attention was given to the main subject matter to be offered junior staff in their courses, with the object of: (a) distinguishing the role of junior staff in this process from the role of others; and (b) imparting as much as they 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 should know, and this will be a weak link in the chain of training where the trainer has not himself learned the substance at CAB or elsewhere. By the 1977 lean period, however, all trainers will almost certainly have been through both the workshop and APC in addition to their field experience.

30. Two workshops can handle 60-70 trainers, more than the total number to be appointed. Since one week of training is not enough to make a good trainer out of a good normal practitioner, a series of five more workshops in various 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. The ARDC has been urged to make as much use as feasible of the expertise of NIBM in teaching techniques. There is no way of knowing at this point how effective these workshops will be; they should be evaluated by ARDC before many sessions are held, with a view to revision.

31. Training Materials. Three aspects of the training materials problem have to be faced. One is the translation of existing materials (distributed by ARDC before course announcement) into regional languages; this is easily done 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 compiled a 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 ARDC feels confident, however, that his Training Cell can produce these materials itself when necessary, with the help of NIBM and other consultants. The ARDC also believes that LDB will prepare materials locally that cover topics relevant specifically to individual LDB. Three LDB have been visited and no such materials were evident as yet. The ARDC is aware of these current deficiencies and is pressing LDB to provide these materials.

32. The third aspect is the most difficult -- the conversion of raw training documents into good training materials. A great deal of sound information exists, but much of it is in the form of lectures delivered by guest faculty at CAB and other training institutions. Much of this "raw" material should be converted into manuals, texts, exercises, graphics, etc. Case studies have been produced and used at CAB and are considered to be one of the most effective training devices in any context. Yet there are not enough of these and CAB faculty has little time to produce more. Adaptation of existing information to become good training materials and production of new case studies can be expected to some extent from the trainers of junior staff, but the amount and adequacy of this material and its interchangeability among LDB are doubtful. This is another area of concern which will need sharp attention from ARDC and emphasis in the workshops for trainers.

144 ANNEX 6 Page iO

33. Facilities and Equipment. Except for the smaller ones, each LDB will need a classroom, a hostel, offices, and a small library including audio- visual equipment. Of these, seven already have their own training centers or have immediate plans to acquire them, and seven others need most or all of the facilities but have no immediate prospects. Nevertheless, some of those without permanent facilities of their own have conducted at least one course under the new program. Although lack of joint living reduces training effectiveness, there are some LDB where living separately in the town is the only sensible solution.

34. The adequacy of training equipment is unknown, but ARDC is aware of the importance of such basic aids as overhead projectors and slide viewers where 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 be essential to its success. Analysis shows that the three senior members of the Cell could visit all LDB once a month during the lean (training) period by traveling in the field three weeks out of each month. During the rest of the year, they could visit each SLDB bi-monthly by spending about one week per month in the field. This would require them to be away from headquarters on average about half the working year in order to monitor the junior training adequately on the ground. At LDB level, a senior official at each Bank would be in charge of the two training officers on a part-time basis and would be responsible to the Managing Director.

IV. Cost

36. Both programs in this proposed project are estimated to cost about US$2.0 M, allocated as shown in Table 3.

March 1977

145 INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Training of Senior and Middle Level Officers Under ARDC I (Status as of October 1976, omitting possible refresher courses)

Trained through Mid-Oct. 1976 Additional Training Projected through Dec. 1977 Other 1/ Long APC Short APC Other 1/ Total Projected Institutions 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 governments, public corporations, 3 etc. 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.

H 41

H 0A INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Projected Training of Senior and Middle Level Officers

Projected for Calendar 1978 Projected for Calendar 1979 APC APC Total Projected Long 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 30 110 135 415 70 130 350 765 RBI 2 3

SCB 10 7

State governments, public corporations, 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 SECOND AGRICULTURALREFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

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 1,430,000 APC in Regions 10 35 350 2 35,000 350,000 Technical Courses 10 30 300 2 19,000 190,000 Management Seminars (non-officials) 2 20 40 1 12,000 24,000 Seminars for Chief Executives (LDB & CB) 2 25 50 1 12,000 24,000 Workshops 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 13,140,000 Workshops 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 Training Steering Group on Junior Training) - Meetings & Travel 100,000 Training Cell Staff (Salaries & Benefits) 1,000,000 Travel (Monitoring Programs and Lecturing) 500,000 Office Space, Utilities, Supplies & Communication 250,000 Equipment (mainly Reproduction) 350,000 Evaluation & Research (Consultants) 50,000 Miscellaneous & 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 7 Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Small Farmers Development Agencies

1. The Small Farmers Development Agencies (SFDA) definition of a small farmer 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 institutional, financial and administrative arrangements for implementing various programs, (v) promote creation of common facilities for production, storage, marketing, etc., and (vi) strengthen the existing cooperative institutions that provide credit, help develop functional cooperatives and strengthen their 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 improved agriculture include land development, soil conservation, minor irrigation, horticulture, demonstration and introduction of new and improved varieties and cropping pattern while those for subsidiary occupations include dairy, poultry, piggery, sheep and goat rearing and also fisheries. The resources for the program are made available to the participants in the shape of subsidy (25% in the case of small farmers and 33 1/3% in the case of marginal farmers and agricultural laborers), and loans from institutional sources.

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 irrigation and animal husbandry programs. Total expenditures on the program has been Rs 850 M during the period of its existence (1970/71 to 1975/76) or Rs 100 per identified participant and Rs 1,370 per actual beneficiary. Each scheme 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 higher proportion reached, while the share reached in the marginal farmers/agricultural laborer category has been correspondingly less. The reasons for this

1/ Including agricultural laborers. 149 ANNEX 7 Page 2

disappointing state of affairs may be that economics of scale and fragmenta- tion of land make groundwater development on small holdings uneconomic and that 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 15 Assam 4 Bihar 18 Gujarat 6 Haryana 3 Himachal Pradesh 3 Jammu & Kashmir 4 Karnataka 7 Kerala 4 Madhya Pradesh 12 Maharashtra 12 Manipur I Meghalaya 2 Nagaland 1 Orissa 7 Punjab 4 Rajasthan 6 Tamil Nadu 12 Tripura 1 Uttar Pradesh 26 West Bengal 1 Goa, Daman and Diu 1/2 Pondicherry 1/2 Delhi 1/2 Arunachal Pradesh 1/2 Sikkim 1/2 Other 8 1/2 160

March 1977

150 ANNEX 8 Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Monitoring, Evaluation and Reporting

A. Introduction and Background

1. Monitoring is defined here as timely collection and analysis of selected data to provide management with information important for current decision making on project constraints and progress, and indication of implementation problems requiring corrective actions. Evaluatior. is analysis of project results. It consists of 'on-going evaluation', i.e. continuous analysis during implementation, and 'ex-post evaluation', i.e. analysis after project completion. Reporting deals here with the flow of information from ARDC to IDA.

2. The ARDC lending program covers a large number of investment categories 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. The magnitude, diversity and geographical distribution of investments financed through the program, make its monitoring and evaluation difficult and considerable progress would have to be made, particularly with evaluation, in order to reach a satisfactory level. The existing systems are reviewed below and guidelines for improvements are provided.

Existing Monitoring

3. The ARDC current monitoring system consists of quarterly reports from participating banks, which provide data on financial and physical progress of each scheme, and field supervisions termed by ARDC 'follow-up' studies, of selected schemes conducted by ARDC regional staff. The main objectives of follow-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 and securities are adequate;

(iii) to ensure that terms and conditions of sanctions have been followed, and examine the extent of adherence to appraisal methods suggested by ARDC; and

151 ANNEX 8 Page 2

(iv) to review lending bank arrangements for supervision and verification, and ascertain adequacy of supporting services.

During a follow-up study, lending bank branches implementing the s&.eme are visited, loan records inspected, field visits made and beneficiaries interviewed. During the field visit, the investment is inspected for conformity with 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 specifying the main findings and requesting corrective actions is then sent by ARDC to the lending bank which takes appropriate action. During 1976, ARDC conducted about 250 follow-up studies.

4. Follow-up studies are essential for control of loan utilization and progress of schemes as well as for direct contacts with farmers. While supervision level has so far been satisfactory, the following main deficiencies require attention:

(i) the method of beneficiary selection for interviews is unsatisfactory and the size of sample may be too small;

(ii) forms used are not standard and questionnaires are often too long;

(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 concentrated on ex-post evaluation studies with the following objectives:

(i) assess farm-level benefits of schemes and farmers' difficulties in obtaining them;

(ii) identify the main categories of beneficiaries;

(iii) identify deficiencies in project formulation, appraisal and/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 studies of four minor irrigation schemes (results are summarized in Annex 1), has assisted in design and analysis of farm benefit survey of Gujarat Agricultural Credit Project, and has been preparing plans for evaluation studies of additional schemes. The small number of studies has been largely a result of the ARDC tendency to limit the number of studies to its staff capacity rather than 152 ANNEX 8 Page 3

to sub-contract them to research institutions. Also, the time lag between event and study results, which is unavoidable in ex-post studies, has reduced the usefulness of findings for operational purposes. The contribution of evaluation activities to the fulfillment of objectives, and impact on management decisions have, so far, been small.

B. Proposed Monitoring and Evaluation

6. Methodology. Crucial to improvement of the monitoring and evaluation systems, would be development of a cost efficient monitoring and evaluation methodology suitable to local conditions which would cover the following issues: (i) definition of clear and limited objectives; (ii) what information is required; (iii) method of sampling; (iv) what method of data collection should be used? expensive method generating accurate data (e.g. frequent visits of farmers) or low cost method, generating less accurate ones; (v) which information should be collected in the course of follow-up studies and which through evaluation studies; (vi) the possibility to use research institutions; (vii) utilization of on-going agricultural surveys and studies; (viii) utilization of monitoring and evaluation systems of the participating banks; (ix) data processing; (x) presentation and utilization of results; and (xi) ARDC role: should it be mainly supervisory and advisory or should it conduct surveys. All these issues must be resolved at an early stage. Expe- rience has shown that evaluation and monitoring systems which are not properly designed and implemented, may become expensive, accumulate unnecessary data, have doubt cast on results' reliability and, therefore, create confusion rather than improve knowledge. There has been considerable experience in India with sampling techniques, questionnaire design and data collection methods. Uti- lization of this knowledge for design of an efficient monitoring and evaluation system would require considerable thought and experimentation. A Project Evaluation Task Unit would be established by ARDC by December 31, 1977 for this purpose, and would operate throughout the project period. This unit would consist of 3 to 4 senior staff who have had previous experience with design implementation and analysis of surveys and would be either seconded to ARDC or directly recruited, and would be free of routine duties. It would propose improvements to the monitoring and evaluation system, supervise implementation and evaluate their effectiveness. It would assist to design a network of surveys and studies and pay particular attention to the problem of timely data processing and to the utilization of results by management. The system designed would follow the general guidelines outlined below.

7. Monitoring. During the project period, follow-up studies would annually cover several hundred schemes, in the course of which several thousand beneficiaries would be interviewed. With adequate selection and data analysis, a sample of this magnitude should provide management with important information on project progress and constraints. The ARDC would, therefore, revise the beneficiary selection by experimenting with several alternative beneficiary selection 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 planned benefits. For example, in the case of minor irrigation investments, important indicators besides the technical ones (distance from nearest well, depths etc would be: ki) investment cost; (ii) time of electrification; (iii) size of command area; (iv) sale of water; (v) cropping patterns; (vi) availability of services (extension credit, inputs); and (vii) technology used (or to be used). It may however, be premature at the time of follow-up study to quantify incremental production. The beneficiary questionnaire would consist of two main parts: (a) basic information on the investment and the beneficiary; and (b) information specific to the scheme supervised. Part (a) of the questionnaire should include a set of questions on income and employment which would enable ARDC to classify the beneficiary by income category in greater preci- sion than is possible using the standard definition of small farmers. The report would quantify the main findings (percentage, averages). Data from part (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 incorporated 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;

(d) average size of command area (minor irrigation);

(e) average time between the installment of a pump and its energization;

(f) average length of construction period;

(g) percentage of farmers who use (or intention to use) of improved technology; and

(h) percentage distribution of beneficiaries' rating of the adequacy of vital services (such as farm-supply, extension, credit).

The collection and analysis of data obtained from the lending banks would also be standardized.

Evaluation

8. Information on investment costs, category of beneficiaries and deficiencies in project formulation, appraisal and execution would come from the follow-up studies (see para 7). The evaluation system would mainly provide factual information on costs, benefits and financial viability at beneficiary level, of the main agricultural investments refinanced by ARDC. This information would be used for policy decisions, for example which investments should 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 8 Page 5 costs of most agricultural investments are affected by climatic conditions and vary from year to year. Their evaluation would therefore require a continuous collection and analysis of data over a period of several years. Given the variety of investments and their geographical distribution it would be difficult to achieve a satisfactory coverage without a maximum utilization of on-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 State government (Ministry of Agriculture, Department of Statistics), banks and universities and would meet at least quarterly. It would start its activities with a comprehensive review of the need for evaluation data and the possibility to obtain it through improvements of on-going surveys, and would initiate new surveys. It would endeavor to direct socio-economic research done by universities towards evaluation of agricultural investments. Where necessary, cost of new studies would be shared between the ARDC and banks.

10. Evaluation Results During Project. In the longer run, it is anticipated that, ARDC would gradually change from actual implementation of evaluation studies, to advisory, supervisory and coordinating roles. However, as the activities of the Evaluation Task Unit and CCAS are unlikely to generate evaluation results before the end of this project, ARDC would have, as a short term measure, to increase the number of studies directly conducted by its staff. During the project, evaluation results would come from the following main sources:

(i) ten evaluation studies of schemes;

(ii) about ten project completion reports (PCR) for IDA financed projects; and

(iii) brief end-of-scheme reports.

11. The following ten evaluation studies would be completed during the project: (i) land development in Andhra Pradesh; (ii) land development in Karnataka; (iii) minor irrigation in Karnataka; (iv) deep and shallow tubewells in Haryana; (v) citrus in Andhra Pradesh; (vi) dairy in Maharashtra; (vii) dairy in Haryana; (viii) poultry in Andhra Pradesh; (ix) poultry in Maharashtra; and (x) fisheries in Karnataka. About two of these studies would be sub-contracted to research institutions and the rest would be conducted by ARDC staff.

12. Project completion reports (PCR) which would include a considerable amount of evaluation data would be prepared during the project period for nine 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 schemes completed during the project period in order to summarize the lesson learned 155 ANNEX 8 Page 6 and utilize it for improvement of design of new schemes. In view of the large number of schemes completed, the reports would be initially prepared for a sample of 30 schemes. They would be based on staff experience, results of follow-up studies, correspondence and other material from the scneme's file. Guidelines are provided in Appendix 2.

14. Evaluation results for investments in fisheries would be available to ARDC as a result of surveys and studies planned under IDA financed Gujarat Fisheries Project. The ARDC would endeavor to obtain the results of any relevant evaluation study conducted throughout the country which would be published during the project period.

C. Reporting

15. The ARDC issues monthly, quarterly, and annual reports. A copy of these reports with a special IDA supplement is sent to IDA. Care has been taken by IDA to limit supplementary information requirement to data needed for effective management and information on actual utilization of IDA funds. Under this project, ARDC would continue providing IDA with quarterly and annual reports and their supplements, according to guidelines provided below, and would prepare the format for the returns, to be agreed by IDA.

16. Quarterly Progress Reports. The report and its supplement would cover the following aspects:

(a) General Review. This section would cover matters affecting the project such as Government policies, staff, legal and administrative acts, weather conditions, financial and economic matters.

(d) Status of Project's Loan Application: Number of schemes sanctioned and ARDC commitment during the quarter and cumulative, by State and by category (minor irrigation, diversified lending).

(e) Project Disbursements

(i) ARDC disbursements (Rs M) by category of farmers (small, other) and by State, during the quarter and cumulative;

(ii) analysis of disbursements against IDA credit (in US$ M) by category of lending (minor irrigation, diversified) compared with appraisal estimates, explanation of serious deviations from plan; and

(iii) up-dated disbursement projections to end of project. 156 ANNEX 8 Page 7

(f) Physical Achievements (to be included semi-annually in the report):

(i) number of units financed during the six months and cumulative from beginning of project; and

(ii) number of units completed during the six months and cumulative from beginning of project.

(g) Monitoring and Evaluation

(i) number of follow-up studies for which reports were received and the number of farmers interviewed in these studies, during the quarter and cumulative, by State and by category of investment; narrative and statistical summary of main findings, especially percentage distribution of beneficiaries by income category;

(ii) number of end-of-scheme reports prepared during the quarter and cumulative and a summary of the main findings;

(iii) progress with evaluation studies and summary findings of studies completed during the quarter;

(iv) progress of work of Evaluation Task Unit; establishment of CCAS; and

(h) A list of participating banks would be incorporated in the September 30, 1977 quarterly report, thereafter, only deletions and additions, if any, would be reported.

17. Annual Progress Report. The report and its IDA supplement would provide the following information:

(a) ARDC annual balance sheet, profit and loss statements, auditor's report to the Board, together with projected budgets, financial estimates and memoir of ARDC activities during the fiscal year.

(b) Participating banks' annual balance sheets, profit and loss statements, auditor's reports to the Boards with specific reference to accounts and reports on project activities.

(c) Overdues in the IDA Supported Program. Demand and overdues in Rs M, and in number of beneficiaries, percentage of overdues, and percentage distribution of overdues according to the number of years by State and bank.

157 ANNEX 8 Page 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

158 ANNEX 8 Appendix 1 Page 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

On-going Agricultural Surveys

1. A cost efficient evaluation system suitable to ARDC would require maximum utilization of on-going surveys and studies in each State. A brief review of the type of surveys which could be utilized for this purpose is provided below.

2. A potentially important source of continuous cost-benefit data on the main crops is the GOI on-going Icomprehensive scheme for studying the cost of cultivation of principal crops' which covers a sample of a several thousand farms throughout India. Its main objective is to collect data for formulation of GOI price policies. Field work is conducted by agricultural universities which use the cost accounting method, in which farmers are frequently contacted. Data processing is done by GOI. Although data collected cover all farming activities in the sample farms, analysis is limited to the crop investigated. Even then there is a long delay in publication of reports. Indepth and timely analysis of these studies could provide useful data on cost and benefits of agricultural investments throughout India. There are similar surveys in a few States (e.g. West Bengal) which with minor amendments involving small incremental costs could also provide useful information.

3. Annual agricultural production surveys are conducted in each State by the State Government. Their main purpose is to provide estimates of production and land use. With minor amendments and appropriate processing, they could provide a considerable part of the data required for evaluation of minor irrigation and horticulture investments. This could include, for example, analysis of yield by rainfed and irrigated crops (and further, by type of 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 of agricultural investments, and other studies which have relevance to investment institutions. For example, in one university the head of the department of agricultural economics has conducted a cost benefits study of minor irrigation, about which ARDC did not know. In another state, the reasons for overdues were studied and a formula for projecting the probability that the beneficiary would default has been developed in one of the universities without the knowledge of ARDC or the banks. With appropriate communications the results of such studies could be utilized for operational purposes.

159 ANNEX 8 Appendix 1 Page 2

5. Some of the banks have established planning units; however, due to lack of coordination, each unit has to conduct its own studies in order to obtain planning parameters such as investment costs, yield per ha, fertilizer per ha. A coordination of effort could reduce costs and generate more reliable data.

6. To sum up, although the situation with regard to agricultural surveys varies from State to State, it is generally characterized by the following:

(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 in each State as they are main interested parties. Good data are essential for realistic planning, as a result of which beneficiaries are likely to realize benefits planned and to repay their loans in time.

March 1977

160 ANNEX 8 Appendix 2 Page 1

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 it for 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 supervisions, percentage of beneficiaries visited, percentage of loans inspected, and the percentage of loans which were misutilized specifying 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 documents from the scheme's file, reports on supervision studies and information from the ARDC staff. It would be prepared by ARDC regional staff and would not normally involve additional visits to the scheme area. 161 ANNEX 8 Appendix 2 Page 2

3. As the number of ARDC schemes completed every year would be large it may not be feasible to prepare a report for each scheme. End-of-scheme reports would, therefore, be prepared initially for a sample of about 30 schemes which ended during the project period.

162 ANNEX 9

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Financial Analysis

1. The project lending program would cover a wide range of investments throughout India, which would be implemented through a large number (about 1,000) of schemes, each normally dealing with one type of investment (minor irrigation, dairy, poultry, etc.). The financial viability of investments would vary from area to area due to differences in local conditions. It is appraised for each scheme by ARDC through representative investment models, and for each individual borrower by the lending bank, through a calculation of the incremental net income resulting from the investment.

2. Ten models were selected to illustrate financial viability of typical investments. Constant end of 1976 farm gate prices of inputs and outputs were used in the calculations and are shown in Annex 10. The assumptions made are shown in the footnotes to each Table.

March 1977

163 ANNEX9 Table 1 INDIA

SECONDAGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

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 1.0 Maize kh 0.2 *Maize kh 0.2 Gram ral/ 0.2 *Wheat ra o.4 Barley 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.4 Maize kh 0.4 *Millet kh o.4 Fodder kh 0.2 *Maize kh o.6 Wheat ra O.8 *Wheat ra 0.8 Gram ra 0.C4 *Gram ra 0.2 *Potato ra 0.2 *Cotton 0.*4 *Sugarcane 0.2 Total 2 .4 Total 3.2 Crop Intensity: 120% 160%

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 Crop Intensity: 120% 150%

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 Crop Intensity: 120% 180%

Model 5: Land Development (Western). 1.2 Ha)

Sorghum kh 1.0 * Sorghum kh o.6 Maize kh 0.2 * Maize kh 0.2 *Wheat ra O.6 * Cotton 0.2 *Sugarcane 0.2 Total 1.2 Total 1.8

Crop Intensity: 100% 150%

kh - Kharif; ra - Rabi. * Irrigated. 164 Source: ARDC.

March 29, 1977 ANNEX 9 Table 2 INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

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 1,320 290 Paddy S 1.1 1,210 300 Wheat N 0°7 980 270 Barley E 0.5 600 170 Sorghum W 0.5 600 200 Millet N 0.7 770 190 Maize N 1.0 1,000 290 Maize E o.8 800 240 Maize W 0.7 700 180 Gram N 0.5 1,000 190 Gram E o.6 1,200 190 Fodder N 1.0 740 230 IRRIGATED: Paddy N 1.9 2,090 740 Paddy E 2.2 2,420 790 Paddy S 2.0 2,200 780 Suimmer Paddy E 2.4 2,640 810 Wheat N 2.0 2,800 950 Wheat E 1.6 2,240 860 Wheat W 1.8 2,520 890 Maize N 1.8 1,800 530 Maize E 1.8 1,800 580 Maize W 1.7 1,700 530 Sorghum W. 1.5 1,800 560 Millet N 1,2 1,320 500 Gram N 1.0 2,000 590 Gram E 1.2 2,400 650 Groundnuts S 1.7 2,720 1,030 Cotton N 1.0 3,600 1,000 Cotton W o.8 2,880 1,160 Potatoes N 15.0 7,500 3,340 Potatoes E 15.0 7,500 3,310 Sugarcane N 50.0 6,ooo 2,970 Sugarcane W 65.0 7,800 4,080

1/ Seed, fertilizer, manure, pesticide, hired labor, estimated at 1/3 of labor 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 9 Table 3

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Financial Analysis

Minor Irrigation Models: Income Statement-/ (Rs)

Without Project With Project Increment

Model 1: Dugwell and Pumpset - 1.2 ha

Gross Income Crops 1,840 6,180 4,340 Sale of Water - l,23o_1 1,230 Total 1,840 7,410 5.570

Operating Costs Crops 410 2,200 1,790 Pump - 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 Income Crops 2,190 9,220 7,030 Sale of Water - 8403/ 840 Total 2,190 10,060 7,870

Operating Costs Crops 570 3,350 2,780 Pump - 840 840 Bullocks 300 600 300 Total 870 4,790 3,920

Operating Income 1,320 5,270 3,950

Model 3: Pumpset 1.2 Ma

Gross Income Crops 2,640 5,070 2,430 Sale of Water - 1 2304/ 1,230 Total 2,640 6,300 3,660

Operatin Coats Crops 840 2,020 1,lD,0 Pump - 630 630 Bullocks 300 600 300 Total 1,140 3,250 2,110

Operating Income 1,500 3,050 1,550

Model 4: Pumpset 2.0 Ha

Gross Income Crops 4,090 8,750 4,660

Operating Costs Crops 1,300 3,210 1,910 Pumpck 740 740 Bullocks 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 Income Crops 740 5,070 4,330

Operat ing Cos ts Crops 240 2,020 1,760 Bullocks 250 600 350 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 CORWPORATION CaEDI? P1028C

Miser Orriaattle Model Cah P1lm Prot.stie.-

1 2 5 8 9 10O 11 12 13 14 15

Mo,del 1:,2,sowa1sn42 9 st ToOler:Desarated Ponds 1/ ~~~8601,710 2,280 2,850 2,850 2,850 2,850 2.850 2,850 2,050 2,850 2, 850 2,850 2,850 2,850 Projeet 1,oa (95%) 9, 00-0 BOrrOt,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,, 100 107 114 125 131 140 158 161 172 184 197 210 220 241 250 Contstnt 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!4

Net 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 9.2 Fineoiel Rate of Rococo 267,

Model 2: Shallow Tuhowe1 Ibfl: 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,950T,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 1,470 820 820 050 020 020 020 020 Pcio Index 100 107 114 127 151 140 150 161 172 184 197 210 225 241 2550 Conete-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 3,030 Coomulti- 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 5 Fi-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%) 3,300 Oorrowec 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 100 107 114 123 131 140 150 161 Cons.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 1,230 C,neolti-e 240 530 1,160 2,150 3,170 4.230 5,520 6,570 DoltCoverageService ~~~~~2.01.3 2.0 2.8 2.9 3.2 3.4 3.6 EcnilRoteof 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%.) 5,150 B -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 100 107 114 123 131 140 150 161 Cou-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 1,430 C: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 4.2 Fincofl RaeR 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 2,200 Prnjent loon (95%) 1,900 T Ste1 ower-n Conteibtino (5%) 100 - TotabO 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...tant1976 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 2,200 CuosletOe 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 8.3 Filoacill 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 2,500 2! 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 2-15 4! 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 2-15 2/ 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

SECONDAGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Financial Analysis 1 Model 6: Coconut (without irrigation) 0.5 ha / (Rs) ------Years ------1 2 3 4 5 6 7 8 9 10 11 12 13-25

I. INCOME STATEMENT Income Coconuts - - - - - 609 1,218 1,827 2,436 2,741 3,045 3,350 3,654 Intercrops2/ 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 Costs Fertilizer 565 pesticides 70 Wages3/ 187 Miscellaneous 21 Intercrops 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 3,131 Less Operating Income Without Project 160 160 160 160 160 160 160 160 160 160 160 160 160 Incremental Operating Income 160 160 160 160 160 7 33 1,144 1,753 2,058 2,362 2,667 2,971 IT. CASH FLOW Inflow Funds Generated 160 160 160 160 160 769 535 1,144 1,753 2,058 2,362 2,667 2,971 Project 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 outflow 4 Investment / 840 376 583 744 744 843 ------Debt Service: Current5/ 44 108 158 227 305 388 926 926 926 926 926 926 Price Index 100 107 114 123 131 140 150 161 172 184 197 211 Constant 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 2,971 Cumulative 116 175 196 171 98 548 466 1,035 2,250 3,805 5,697 7,925 -

III. FINANCIAL INDICATORS Debt Service Coverage 3.6 1.6 1.2 0.9 0.7 2.8 0.9 2.0 3.3 4.1 5.0 6.1 Financial 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 9 Table 6 INDIA

SECOND AGRICULTURALREFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Financial Analysis

Model 7: Dair (2 cross-bred cows)

------Years ------

1 2 3 4 5

I. INCOME STATEMENT Gross Income Milk 2/ 3,390 6,780 Manure-13 100 200 Total-3 3,490 6,980 6,980 6,980 6,980

Operating Costs Green Fodder4 / 360 720 Dry Fodder5 /6/ 260 530 Concentrates- 7 1,040 2,070 Veterinary 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 FLOW Inflow Funds 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

Outflow 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 INDICATORS Debt 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 9 Table 7

INDIA

SECOND AGRICULTURALREFINANCE 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 STATEMENT Gross Income Eggs 1/ 70.4 Manure g 2.5 Sale of empty gunny bags 3/ 1.0 Sale 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 Costs Chicks 5/ 4.0 Feed 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 .959 Operating Income - 17.0 17.0 17.0 17.0 17.0 17.0 17.0 17.0 33.6

II CASH FLOW Inflow Funds 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- - _ 4.0o -- (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 7 9, .2 2 8 _ (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 INDICATORS Debt 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 annum 4/ Rs 9 per layer 5/ 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 layer 8/ Rs 2 per layer 9/ 2% of investment in buildings and equiplment (Rs 45,000). 10/ 11% on 50% of loan 11/ 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 equipment 13/ Residual value of buildings (50%) 14/ The principal and capitalized interest are amortized in years 2-8 at 11% annual interest 15/ Calculated from the net benefits stream which equals operating income minus investment costs. 170

April 13, 1977 T.ble.4 INDIA

SECONDAGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

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 2 Production 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 4 Fuel 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/ 231 Ice 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 FLOW Inflow Funds Generated 18.6 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 42.1 Project Loan (87.5%) 123.0 Borrower'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 100 107 114 123 131 140 150 161 Constant 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 76.9 Cumulative 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 INDICATORS Debt Service Coverage 2.7 1.7 1.8 2.0 2.1 2.3 2.4 2.6 FRR 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 9 Table 9 INDIA

SECOND AGRICULTURALREFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

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-/ 2.2 Maintenance of boat-4/ 0.5 Maintenance of motor- 0.5 Gear maintenance and replacement- 3.7 wagesa/ 7.2 Food7/ 8/ 1.5 Miscellaneous- 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 8.6 Project Loan (92.5%) 29.0 Borrower'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 100 107 114 123 131 140 150 161 Constant 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 17.3 Cumulative 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 2.3 FRP1 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 480 for 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 9 Table 10

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT 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 10 Page I

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Economic Analysis

Production

1. The project's primary economic benefit would be an increase in agricultural production for domestic consumption and export. The project would complete some investments initiated earlier, mostly under ARDC I and the State based agricultural credit projects, and initiate others that, due to this project's short duration, would be completed after its end. Estimates of the project's impact on production should, therefore, be regarded as indicators rather than precise figures. Incremental production estimates (paras 7.01-7.02) are based on the following assumptions:

(a) Minor Irrigation and Land Development: The total area brought under irrigation would be about 0.9 M ha. The increase in crop area resulting from increase in crop intensity is estimated at about 400,000 ha.

(b) Diversified Lending:

Investment Unit No. of Units

Plantation and Horticulture ha equivalent /a 20,000

Dairy 1 cow 60,000 Poultry 50 birds 34,000 Sheep 25 ewes 14,500 Fishing vessel 460

/a Investment period in plantation/horticulture is 4-6 years; as the project period is only 2 years, the number of ha equivalent was calculated by dividing the total estimated investment in plantation/ horticulture by the average investment per ha over 4-6 years.

Economic Rate of Return

2. Economic rates of return were computed for the same models which were used for financial analysis (Annex 9). The main assumptions made are the following:

174 ANNEX 10 Page 2

(a) Crop development patterns and physical coefficients are the same as in the financial analysis.

(b) Prices of internationally traded inputs and outputs are based on Bank projections for 1980, with adjustments for transport, handling, processing and quality. Com- modities like eggs, milk and fish were priced at current farmgate price. Prices are listed in Table 3.

(c) Economic benefits from sale of water are based on the computed incremental economic benefits per hour of pump operation.

(d) Current costs (financial analysis estimates) net of duties and taxes are used for estimating investment costs.

(e) The investment in electric connections was added to investment costs in the minor irrigation models (excluding land development). The economic price of electricity was estimated at Rs 0.35 per kwh.

(f) The economic price of hired labor was assumed to equal the going wages. Given the high rates of underemployment and unemployment, especially among small farmers who would be the majority of the beneficiaries (over 50%), the economic price of family labor was shadow priced at 50% of hired labor rates; the sensitivity of the ERR to this assumption was tested (assuming full hired labor rates for 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 rate of 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 estimated at 0.75.

2. Based on these assumptions, the economic rates of return would range from 22% to over 50%, as shown below and in Table 1:

175 ANNEX 10 Page 3

Model ERR (%)

Dugwell and pumpset 27 Shallow tubewell 41 Pumpset (1.2 ha) 35 Pumpset (2.0 ha) 32 Land development over 50 Coconut 22 Dairy 39 Poultry 23 Mechanized fishing vessel 39 Mechanized canoe 34 Tractors n.a. /1 Weighted Average /2 about 32

/1 Economic aspects of tractors have been investigated in Bank financed studies in Punjab and in Gujarat. Based on the Gujarat study the PCR for Gujarat Agricultural Credit Proj- ect estimated the ERR of tractors at 16%. The results of both studies are, however, regarded inconclusive. An additional investigation of the economics of tractors will take place during 1978 in connection with the preparation of a PCR for Punjab Agricultural Credit Project.

/2 Excluding tractors.

3. Sensitivity analysis was carried out to examine the affect of changes in costs, benefits and SER on the rate of return. Results are shown in Table 2.

April 1977

176 ANNEX 10 Table I

INDIA

SECONDAGRICULTURAL REFINANCE AND DEVELOPMENTCREDIT 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 Pumpset Benefits 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 3.8 Net 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 5.8 Economic Rate of Return 27%

2. Shallow Tubewell Benefits 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 12.0 Investment 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 6.1 Net 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 7.6 Economic Rate of Return 417.

3. PumPset - 1.2 ha Benefits 2.9 3.7 5.0 6.2 6.2 6.2 6.2 6.2 Investment Costs 1/ 7.9 ------(3.1) operating Costs 0.9 1.9 2.5 3.1 .1 3i L Net Benefits (6.9) 1.8 2.5 3.1 3.1 3.1 3.1 6.2 Economic Rate of Return 35%

4. Pumpset - 2.0 ha Benefits 2.1 4.2 5.6 7.0 7.0 7.0 7.0 7.0 Investment Costs 1/ 7.9 - - - - - (3.1) Operating Costs 1.2 2.5 3.3 4.1 41 4J L.I Net Benefits (7.0) 1.7 2.3 2.9 2.9 2.9 2.9 6.0 Economic Rate of Return 32%

5. Land Development Benefits 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 7.5 Investment 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 3.0 Net 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 4.5 Economic Rate of Return Over 507.

6. Coconut Benefits 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 3.5 Investmeat 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 1.3 Ret 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. Dairy Benefits 3.5 7.0 7.0 7.0 7.0 Investment Costs 5.8 - - - (1.1) operating Costs 2.3 4.7 4.7 4.7 4.7 Net Benefits (4.6) 2.3 2.3 2.3 3.4 Economic Rate of Return 3997

8. Poultry Benefits - 82.9 82.9 82.9 82.9 82.9 82 .9 82.9 82.9 82.9 Investment 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 51.0 Net Benefits (59.5) 14.9 14.9 14.9 14.9 14.9 14.9 14.9 14.9 51.9 Economic Rate of Return 237.

9. Mechanized Fishing Vessel Benefits 44.4 111 11. hIl Investment Costs 132-.1 52.0 (32.3) Operating Costs ? 4 a...4_3_ 66. 3666.3 66.3 66.3 66.3 66.3 66.3 .3 66. .3 Net 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 77.1 Economic Rate of Return 397%

10. Mechanized Csaoe Benefits L2I. 22 I 25.7 25. 72. 25.7 25,7 25.7 25.7 25.7 Investment 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 17.0 Net Benefits (23.2) 8.7 8.7 8.7 8.7 3.9 8.7 8.7 8.7 17.7 Economic Rate of Return 347.

1/ Include investment in electric connection.

2/ Years 15-25.

April 19, 1977 177 ANNEX 10 Table 2

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

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 Fishing Vessel 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 10 Table 3 INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

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

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

Schedule of Estimated Disbursements-/

IDA Fiscal Year Disbursement During Cumulative Disbursement and Quarter Quarter End of Quarter ------US $ M ------

1978

September 30, 1977 December 31, 1977 10.0 10.0 March 31, 1978 20.0 30.0 June 30, 1978 30.0 60.0

1979

September 30, 1978 15.0 75.0 December 31, 1978 20.0 95.0 March 31, 1979 25.0 120.0 June 30, 1979 35.0 155.0

1980

September 30, 197>/ 25.0 180.0 December 31, 1979- 20.0 200.0

l Estimated date of effectiveness: August 31, 1977 2/ Estimated closing date: December 31, 1979

180 ANNEX 12 Table 1

INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENT CORPORATION CREDIT PROJECT

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 IDA projects 1,055

Balance of program eligible to be financed by 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 AGRICULTURALREFIN6NCE AND DEVELOPMENTCORPORATION 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 - Bihar~ _ 58.0 73.0 200.0 225,0 5.0 7.5 5.0 5.0 0.5 0.5 - - 1.0 1.0 1.0 1.0 48.5 35.0 _ _ 261.0 275.0 Orics-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 _ _ 152.0 192.5 West 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 8.5 R.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 _ _ 178.0 183.0 eJat 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 _ 80.0 115.0 187.0 terntohak 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 3.0 230.0 262.0 Kerala 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 66.0 Madhya 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 2.5 298.5 295.5 M.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 - - 319.5 377.0 Puojab 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 127.0 129.5 Tamil 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 84.0 Utter 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 - - 322.5 344.0 Others 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 12 Table 3 INDIA

SECOND AGRICULTURAL REFINANCE AND DEVELOPMENTCORPORATION CREDIT PROJECT

Indicative Cost Estimates (Rs M)

I. Minor Irrigation Local Foreign Total

Minor Irrigation

Dugwells l,548.o 211.0 1,759.0 Pumpsets 417.0 57.0 474.0o Shallow Tubewells 572.0 78.0 650.0 Lift Irrigation 127.0 17.0 144.0 Deep Tubewells 78.0 11.0 89.0 Electrical Connettions 484.o 66.0 550.0 Miscellaneous Works 1/ 120.0 16.0 136.o

Sub-total 3,346.o 456.o 3,802.0

Land Development

Land Leveling 116.0 7.0 123.0 Land 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 27.0 269.0 Dairy 216.0 24.o 240.0 Poultry and Sheep 130.0 14.0 144.0 Fisheries 90.0 10.0 100.0 Farm Mechanization 322.0 107.0 429.0 Other 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.

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