Rural Finance System and Banking

Chapter 1

Rural Economy

Even in recent time, third world countries were believers in industry based development. This policy of development benefited the urban dwellers relatively more because much of the industry grew up infrastructure developed cities and their suburbs. This uninterrupted policy did cause prosperity in rural areas as such rather the economic condition of the region was deteriorating gradually.
In the first half of the 20th century communism was established in countries of Asia and East Europe. The rulers of the third world countries in which communism was not established became so fearful of rebellion of disgruntled rural people that they started to adopt some isolated rural development programs. However, all these development programs could not make any such contribution to improvement of economic condition of rural people because almost all the programs were taken for short period and for effect purpose. Moreover, all these projects failed miserably to achieve desired results as they were not implemented by keeping any connection with the overall development plans. After evaluating all these few isolated projects, many researchers found that benefit of these projects was enjoyed most by the rich moneylenders and landlords, in single word by people of opportunist class. The researchers also found despite some projects were able to increase the villager’s income, they were very insignificant compared to the immense size of rural population.
In such condition, the World Bank advised the third world countries to implement overall development planning based on rural area.  The World Bank gave strong advice on implementation of overall development planning by coordinating various sectors of rural economy. This development strategy is called as multi-sectoral rural development strategy. In the multi-sectoral development strategy, production sector has been joined not only with service sector but also with infrastructure development sector. Production sector can be divided into poultry, livestock, fisheries, handicraft, small business etc. besides crop production. Other than these, health, family planning, education, communication, good provision of housing and entertainment may seem like to include in service sector for the time being. Actually in the final analysis, the development of all these sectors contributes greatly to the growth of productivity of developing financial sector. Similarly, development of infrastructure for example roads and highways, markets etc. in a planned way accelerates the development of production sector.
There is no doubt that the mentioned multi-sectoral development strategy will be able to improve the economic condition of rural people. However, implementation of all these projects will require huge amount of money which is impossible for rural people to supply. So, there requires invention of successful organizations that shall have abundant deposits and high number of branches present everywhere and above all of them shall be operated with clearly defined policy and strategy and by keeping achievable goals in front and above all by favorable well-trained workforce.
                        Characteristics of Rural Economy
Many similarities can be found among third world countries despite differences in their location and stages of development.
These general characteristics are given below:–
Vicious circle of poverty
Low rate of capital formation
Over reliance on agriculture
Short supply of entrepreneurs
Acute shortage of technicians
Scarcity of appropriate technology
Underdeveloped infrastructure
High rate of population growth
Scarcity of appropriate technology
High rate of inflation
Too much dependence of foreign aid
Impact of frequent natural disaster
Political instability
Low literacy rate
Unemployment problem
Underdeveloped and unorganized market mechanism
Underdeveloped and unorganized financial market
Non-progressive and unchanging social system
Backward looking women society
Ill-effects  of village politics
                        Determinants of Development of Rural Economy
After analyzing the characteristics of underdeveloped rural economies, it is extremely important to know the determinants of overcoming the mentioned condition of rural economy.
The determinants are shown through the following diagram:–
Overall economic condition in the rural area is possible through appropriate improvement and exercise of the above mentioned quantitative and qualitative determinants.
The Problem of Maintaining Harmony in Rural Development Planning
According to Hores Bowels, adviser of FAO and eminent American rural economist, maintaining harmony on certain essential issues in rural development planning is pre-condition for rural development. The issues on which harmony needs to be maintained are the following:–

  1. Consumption and saving
  2. Production related investment versus social infrastructure development investment.
  3. Limit in priority for agriculture and industry
  4. Internal demand versus production for export
  5. Setting limit for government and private investment.

The above mentioned essential issues of harmony are discussed briefly:–
Consumption and saving: Unnecessary consumption reduces amount of savings. Need for saving is undeniable for capital formation but production will fall if consumption is reduced by an unbelievable amount.  This will indirectly reduce production and will become as obstacle for formation of savings and capital. Therefore, consumption level and consumable products should to be set so that production is not interrupted and sufficient saving is at hand to make investment.
Production related investment versus social infrastructure development investment: Some think investment in social infrastructure in wastage of money. They believe only in production related investment but without infrastructure necessary seeds, fertilizer, equipment, raw materials etc. it is difficult to procure in right time and to market them in best way and this affects the profitability of the produce greatly. Therefore, development of social infrastructure in definite amount and in appropriate way is extremely necessary that will decisively help productive investment to succeed.
Limit in priority for agriculture and industry: Agriculture and industry are both production related activities and dependent on another. If agriculture is neglected, importance of industry may be reduced due to shortage of necessary raw materials and need for sufficient local market for industry produces. This is because neglected agriculture forces reduction in income of rural people and this makes them incapable of consuming industrial goods despite having demand.
On the other side, industry can not progress in due rate if priority to the agriculture is given by keeping industry in negligence because necessary equipment, fertilizers, pesticides, medicine etc. are produced in industry. On the other hand, if rate of agricultural production remains unhindered still lack of marketing of agricultural product will hinder agricultural production remarkably.
Therefore, because agricultural and industrial development are dependent on one another, so investment limit in these should be set with importance
Internal demand versus production for export: By exporting goods a country earns foreingn exchanges that help to import necessary machines and equipment, raw material and technology. However, only giving emphasis on export by ignoring domestic need will indirectly cause import of goods to meet domestic demand. In this situation, the earned foreign currency is used to pay foreign debts. In the final analysis, this type of export is proved as self-deceptive. On the other side, only production based on meeting internal demand will fail to modernize itself for lack of necessary foreign currency and is incapable of making production multifaceted.
Setting limit for private and government investment: Like, it is not desirable that all the sectors of development should be directed by the government; similarly private initiatives for all sectors are not eager. Therefore, infrastructure development is suitable for government sector and even parts of service sector can be developed under government supervision. For example, roads and highways, school- college, hospital, law and order situation are much more possible for the government to administer efficiently and neutrally. On the other side, the entire development sector should not be in the private sector. Highly profitable, monopolistic goods, goods important for public health, goods necessary for public security and state security are desirable to be produced under government supervision. Government can permit the private sector to produce depending that they pay lawful tax and duty duly and can change and expand production depending on disparity in use of factors of production. In the process of determining this sort of limit of government and private investment, amount of capital to be invested, supply of entrepreneurs, administrative efficiency, and honesty and patriotism of government employees are extremely important to consider.
Therefore it is extremely important to set the type and limit of government-private investment in various sector for the wider interest of the country by not neglecting the private sector rather by evaluating the capacity of entrepreneurs.
Without adequate capital investment is a dream to rural development. For any kind of economic development planned capital investment is essential. Only capital investment is not the mean of rural development, there must be need development of social infrastructure. But this infrastructure development needs adequate investment. This investment may be private or public. From the experience it is seen that in capital and mixed economies government spend necessary capital for development of social infrastructure but for economic activities it spends less. On the other hand in social economy in both the factor govt. spends all the necessary investment.
Generally govt. invests for rural infrastructure development by its financial budget. On the other hand in this type of economy agriculture, industry, business etc, private investors invest by savings.
Rural people can collect money from three sources for economic activities. They are
Savings from past income
Sale revenue from present assets
Loan from other persons
Money collect from sale of assets do not bring additional money. Because is the transfer of resources from on surplus family to other surplus family. It is a temporary action. For this reason to develop the rural people and their life we need collection of deposit from rural, sub-town and town and invest this deposit effectively and efficiently.
 Necessary to collect money other than family source
In the third world country like Bangladesh inevitable fund is very limited. Because their income is low that’s why savings is also low. To convert the ancient period agriculture method to modern method here also need adequate investment example: machinery, hybrid seeds, more fertilizer, water, and insecticide using we can more crop pre acre from before production. More than half of the landless people also live in rural area, for upgrading their life it would be essential to popular them the cottage business and the small business. To perform this we need adequate capital but here is also the short of capital.
Historically, Bangladeshi rural people suffering for necessary capital. There are only 5 to 10% people can save. The left 90% people depending on loan from others or sale of assets. In a survey in India and Bangladesh 80% land is cultivable or house making land and only one fourth of the land are at the hand of rural people. So we can say that above 60% people are living by borrowing money from others
So for the development of the rural people there need adequate capital to upgrade the life of rural people
 Rural banking in rural development
Like other loan term the rural loan also the same. Here also one party gives loan to another party by consuming less or sale of the assets. When one party need any asset or consumable think then other help this family. This help can be monetary or non monetary. So which goods, money or technology not in the hand of any rural people, they avail it with an agreement to back it is called the rural loan
In which persons or institutions give money to purchase the above things and collect that money with the interest is called the bankers or Banks. For this which activities are taken by the bank is totally called the rural banking. But interest collect is depending on the bank.
 Difference between rural loan and agricultural loan
Rural loan is wider than the agricultural loan which they can use for ant purposes. So rural loan can be 3 types and they are:

  1. for productive agriculture, small cottage and small business
  2. for consumption of goods or any type of arrangement such as marriage purpose
  3. Infrastructure development such as road, school. Hospital mosque madrasha, culvert

On the other hand agricultural loan means for agricultural investment purpose investment in seeds, fertilizer, machinery, insecticides etc. with a view to increase the production.
Now the difference between rural loan and agricultural loan is given below:
 Industry VS agriculture and rural loan
The concept of agricultural and rural loan is much more new concept than the industry loan. Because the importance of rural development is not heard by so many people before they heard the industry loan. Now the difference among Industry VS. Rural and agricultural loan is given below:

Serial no.Industry loanSerial no.Agricultural Loan/rural loan
01Industry loan is used only for the industry and based on the town and sub-town basis.01Rural loan is given for all the rural development activities based only the rural basis.
02Industry loan is given on long term basis02This type of loan is given on medium and short term basis.
03Most of the loan amount is used for collecting machinery product.03On the other hand this type of loan is used for purchasing input.
04This loan amount is relatively large and the borrowers are comparatively few.04Agricultural and rural loan amount is relatively small but the borrower number is comparatively high.
05This type of loan sanction is depending on the new entrepreneur come to this sector.05This type of loan is disbursed all around the year.
06Interest rate is high06Interest rate is relatively low.
07Without sufficient collateral the loan amount is not sanctioned.07Some of agricultural and rural loan is given without collateral.
08Supplier of this type of loan is large financial institutions.08The source of this type of loan is almost the non-organizational institution.
09The loan amount is determined by the capacity of the financial institution.09The amount is determined by the money needed of the borrower.
10In case of industry loan there follow the certain method, project appraisal and valuation.10In case of this type of loan the project appraisal and valuation is not done.
11This type of loan is renewable.11This type is not renewable.
12Industry loan is given in domestic as well as foreign currency.12Agricultural and rural loan is always given in domestic currency.

            Purposes of rural finance
In rural area the rural finance is executed because of increasing the income of the rural people as a result their allover financial condition will be improved. The purposes of the rural finance are given below:

  1. Rural infrastructure development : Rural infrastructure can be divide in two parts

A)     Economic infrastructure- communication, vehicles, electricity etc.
B)      Social infrastructure- Mosque, madrasha, school, college, hospital etc.
Both type of infrastructure is developing by the finance from the govt. or private sources. To characterize this type of development up to this time is no option to take loan for this purpose.

  1. Reduce the disparity between the town and the rural people: The roadmap of development of town is different from the road map of the rural. Because the infrastructure development in town where the govt. investment is too high. Overall the establish infrastructure, administration, nearness of market and other facilities is favorable in town and the people are chosen the town to perform their business activities.

For this reason the private and public investment in rural area is low. That’s why the financial disparity between the town and rural people is increasing. So, by giving loan to the rural people there is try to reduce the gap between the rural and town development

  1. To increase the production of food and supply: Historically, the rural area in Bangladesh is suffering for sufficient food and other consumable goods. To reduce this deficit we need to increase the food production. By applying new method and using technology we can increase the food production but for this reason we need sufficient capital.
  1. To increase the employment opportunity: From the statistics we see that the unemployment is increasing in rural area than the town area and after some time it would be intolerable. To create employment opportunity it is needed to develop the economic and social infrastructure and for this purpose there is need much more capital. Since the savings rate of rural people is low that’s why we need additional support from the private and the public sector to increase the employment opportunity. If we can create the employment opportunity then the income also be higher and their financial condition also be increased.
  1. Women participation in economic development: From the statistics we see that only 10% of the total women participate actively in economic activities. When this rate would be high the rate of rural development also be high. So by organizing the organization and give the loan to the women it would be helpful to women participation in economic development. As a result the family income will be raise and the recognition of the women also be increase.
  1. To reduce the economic disparity among the rural people: Earlier we said that the rate of savings and investment rate of rural people is below10%. The people who can invest more the economic upgrade them also increased. But the disparity between the rural rich and poor people. So here if the rural poor can not savings money and that’s why they can not be also investing and disparity also be increased.
  1. Proper utilization of natural resources: Since in rural area there is not using the technology and the scarcity of skilled people the natural resources in rural areas are not using properly. To use these resources properly we need adequate investment in proper time. To increase the production by using this resources and technology we also need capital. Since in rural area the savings rate is low that’s why it is needed to invest in rural areas by giving loan to them.

 Classification of Rural Credit
Basically rural credits are of two types; such as:
Consumable credit
Production credit
                        Consumable credit
The poor rural men and women always take loan in their hard time. The institutions do not sanction that loan for consume. So, the poor rural households must have to borrow from the jaminder and other non-institutional sources with high interest rates. The consumable credits are taken because of the following reasons:
for food
for purchasing cloths
for social ceremony (marriage, birth day, occasions, etc)
to pay previous debt and
to build houses

  1. b.      Production credit

The credits that are used for the production purpose are divided into two types. Such as:

  1.         I.      Agricultural credit
  2.       II.      Non-agricultural credit

                        Agricultural credit
The credits that are sanctioned to operate the agricultural activities are known as agricultural credit. These agricultural credits are classified further into two categories.
Crop credit
Non-crop credit
Crop Credit
Crop credit is four types. Such as:

  • Food crop credit
  • Financial crop credit
  • Credit for fruits garden
  • Credit for storing

Non-crop Credit
The credits, that are sanctioned to perform the work which does not need any agricultural land or need very little agricultural land to perform the work, are known as non-crop credit. The credits are: milk industry, poultry firms, fish cultivation, cattle fattening, etc.
Position of credit in the rural economy
Non-agricultural credit
The development non-agricultural credit is the recent addition in the rural economy. As the numbers of landless and marginalized farmers are increasing dangerously, the domestic and international economists give emphasis on the non-agricultural credit and make the investment in a bulk figure. The non-agricultural financial items on which the credits are sanctioned are:

  1. Handicrafts industry
  2. Small industry
  3. Village business and
  4. Financial services

 More Classification of Rural Credit
The rural credits are further classified in lieu of the previous classifications. Such as:
Investment purpose agricultural credit
Normally the investment purpose agricultural credit amount is bigger than production purpose credit. Agricultural credit covers forming agricultural firm, other houses building, store houses building, construction and rehabilitation, etc credit. On the other hand, making land plain, dig pond, preparing sewerage canal, etc fall into development agricultural credit. Nevertheless, tractor, power pump, harvest, etc, credit is under agricultural machinery credit.
Classification on the basis of Maturity
Based on the maturity, the rural credit is three types. Such as:
The short-term credit is for 3 to 18 months. In case of cottage industry and rural business, the short-term credit may be for few days and last for a year. Only for the cases of agricultural, the farmers get their crop in 18 months and that’s why the credit is for 18 months in this case. The mid-term credit duration ranges from one year to five year. And the long-term credit ranges from 5 years to 20 years.
 Classification of Rural Credit on the basis of Collateral
The rural credit is of two types on the basis of their collateral. Like:
Without Collateral Rural Credit
Sometimes the banks sanction credit on the basis of the individuals’ goodwill. On the other hand, the non-institutional debtors provide loan to their relatives without any collateral.
With Collateral Rural Credit
If the collateral value is less than the value of the loan, then it is called partly collateral rural credit. On the other hand, if the collateral value is at least equal or more than the loan value, then this is called fully collateral rural credit
Individual’s Assurance
Bank sanctions credit on the recommendation of the prominent person without taking any collateral. But, if the creditor fails to repay the loan then the guarantor personally repays the loan by selling his/her property or from the personal income. So, the loan granting institutions or banks first investigate the property of the guarantor to minimize the risk of failure to repay. Also, the banks assured that the previous transactions of the guarantor are satisfactory or not.
Credit on the basis on the Creditors’ type
The credits are the following types on the basis of the creditor:
Small business credit
Small entrepreneurs credit
Farmers’ loan
Marginal farmers’ loan
Landless credit
Self involved credit
 Current and Fixed Rural Credit
The current rural credits are taken to fulfill the demand of production raw materials or pay the wages of the labor. On the other hand, the rural individual takes loan to make equipment development, construction, machinery, etc.
 Extra Classification of Rural Credit on the basis of Uses
The loans taken for the uses purposes of agriculture, industry or business are named separately. Some of them are mentioned below:
Seeds loan
Fertilizer loan
Vehicles credit
Machinery credit
Pond credit
Land development credit
Fish credit, etc
 Classification of Rural Credit Basis on the Sources
The rural credits are classified below based on their sources:
 Demand and Supply of Rural Credit
It is necessary to have the similar knowledge about the demand and supply of rural credit as the other goods demand and supply. The supply should be as per the demand. If the supply of rural credit is more or less than the demand of rural credit then there would be a mismatch in the rural economy. So, it should be the goal of the planned economy of balanced demand and supply of rural credit. The indicators of demand and supply are discussed below:
Demand of rural credit
It should be aim of developing country to fulfill the demand and creating extra demand of rural credit. The demand indicators are:
Consumers constructional power
Possibility of increasing the production
Production procedure
Crop/production mixture
Use of innovational power
Use of developed technology
Limit of machineries
Change of seasons
Required skills and labor expend
Loan expenditure
Collateral for the loan
The consumers behavior
Government’s behavior on providing loan in rural economy
Loan payment procedure
The risk of using credit
Monitoring the uses of credit
The behavior and attitude of the credit granting institution’s employees
Position of developed market
Expand of infrastructure development
Receiving of raw materials in production
Difference between application for loan and time of receiving the loan
Number of economical market and their position, capital and skill
Probability of getting subsidy from the government
Skill and training of the loan users
Supply of rural credit
The supply of rural credit depends of the following factors based on the economic activities and sources of credit:
The government’s attitude to develop the rural peoples’ economic condition;
The central bank’s attitude and organizational skill to provide the rural credit;
The monetary and income tax policy on rural economy;
The number of credit providing individuals or institutions;
The credit providing firms’ loan policy;
The fund availability of the credit providing firms;
The rural deposit availability of the loan providing firms;
The attitude of the central bank to re-financing the rural people;
The flexibility of the loan and the loan expenditure;
The rate of interest of the loan;
But there are some determinants that have special impact on demand of rural credit. Examples of some determinants given below:
A) In case of growing crops

  1.               I.      Duration of irrigation;
  2.             II.      Area of cultivable land;
  3.          III.      Nature of land fertility;
  4.          IV.      Nature of density of farming crop;
  5.             V.      Potentiality of adopting associate profession;
  6.          VI.      Extent of promptness of government agriculture employee.

B) In case of cottage and handicraft industry
Quantity of Supply of entrepreneur;
Certainty of market for produced goods;
Condition of supply of skilled technicians;
Potentiality of export market for produced goods
C) In case o cattle rearing
Quantity of entrepreneurs in cattle rearing;
Nature of demand of cattle and animal milk;
Nature of demand of cattle and animal meat;
Potentiality of gathering high-class cattle and animal assets etc.
Supply of rural credit depend upon the following matters on the basis of economic activities or sources of credit:
Attitude of government in developing financial condition of rural people;
Organizational Skillness and attitude of central bank in supplying rural credit;
Government monetary and fiscal policy for rural economy;
Extent and quantity of institution or individual involved with supply of credit;
Credit policy and skillness of institutions in supplying credit;
Adequacy of fund of institutions involved with supply of credit;
Adequacy of collected rural deposit by the institutions of credit provider;
Attitude/adequacy of refinancing by the central bank;
Disparity of cost for credit providing and operation of business;
Interest rate paid on credit;
Intensity of risk in providing loan;
Potentiality of rural savings for present and future;
Method of supplying raw materials, seeds, fertilizer, and other equipments to use credit;
Attitude of borrower for payment of loan;
Economic, political and social stability;
Limit of decentralization of power for providing credit in lower level
Training and attitude of employees engaged in institutions that provide loan.
                                           quantity of demand for rural credit in Bangladesh
 n Bangladesh no comprehensive scientific survey for measuring demand of rural credit in rural area had been occurred until today. But there were some endeavor for estimation. Some estimation of rural credit of those endeavor has been given below:


In above mentioned loan deficit only total supply of agriculture loan has been shown against demand of agriculture loan. This deficit was 76% in the year of 1977-78, which decreased to 50% in the year of 1979-80. Knowledge on nature of deficit rural credit cannot be acquired from above explanation. It is very difficult to be known about the condition of such real deficit without an extensive scientific survey.


It is mentioned above that no extensive survey had been done today for measuring demand, supply and deficit of rural credit. But it is undeniable that institutional loan system supply very little amount of demand of loan needed. It is known from 1956 Dhaka University Socio-economic Survey that only 6.69% demand of total credit need was settled by institutional loan. It was 10% according to 1960 Pakistan agriculture survey, 14% according to cooperative registrar survey. Agriculture loan committee, formed by government in 1969, estimated sources of institutional loan as 14.86%. Among the above mentioned four sources the letter three besides the first one was estimated by government. In an unbearable situation the author himself tried an endevour for estimation of total deficit of rural credit. In India there were some extensive survey about the portion of input that comes from investor’s own savings and the portion that comes from credit. The deficit (From1972-73 to 1978-79) found by the author by relating the portion of ratio with the national rural production collected from different sectors has been given below

Schedule for deficit of Rural Credit (From1972-73 to 1978-79):


Source4s: Khan A. R. “Institutional Finance in Rural Development—a comparative observation of India and Bangladesh” Thesis taken for P. hd. Degree in University of Puna, 1983 Page no. 276.

It is realized from mentioned information that at the beginning of the decade of 80 more than 90% of total demand of credit remained as deficit. It will be possible to change the expected financial position of the rural people if the deficit of rural credit is eliminated as soon as possible. Otherwise the 5th annual planning or government declaration will remain as fake word in the name of rural development.



It is a conventional technique of institutional loaner to justify the competency of getting credit. It is not right that any individual or society will get loan against their application.

Loan is provided to those people who are abiding by the disciplines and regulations of credit management. On the other hand non-organizational loaner also justify competency of loan seeker directly or indirectly or explicitly or inexplicitly. But non-institutional loaner emphasis on security of recovery of loan amount with interest. But institutional loan provider also considers the benefits of credit seeker besides appropriate conditions.

                     It is worth mentioned that as commercial or industrial loan seeker are rich, educated and aware about knowledge of business competency of getting loan of those people is measured tightly. Measurement of credit competency of those people is very important as each of them apply for a lump sum amount of loan which is equivalent to or more than one thousand rural credit   applicant.

                  However, the factors considered in granting credit by the institutions that worked in rural area are as follows:

1)Objective of loan

2)Stability of loan applicant in rural area

3)Competency and good reputation of loan applicant

4)Capability of giving collateral for the loan amount that has applied for

5)Potentiality of financial benefits of loan applicant by using loan

Discussions of above points are given below:

a)    Purpose of the credit proposal:

In rural areas the credit institutions do not give loan for all purposes, especially for consumption purpose. On the other hand, loans are not sanctioned for all financial transactions, such as loan for:  loan sanctioning to others with interest, speculation business etc. Bangladesh Bank or Head offices of that institutions specify the purposes for which loan will be sanctioned (before loan sanctioning).


Loan for cropping, poultry firm, cattle breeding, fisheries, handicrafts.Loan is not sanctioned except for the above purposes, normally.

b)   Applicant’s performance in rural area:


Generally people who do not have houses, land property or business property do not get loan. Applicants who are guests, beggars, travelers do not get loan.

c)Applicant’s reputation and usability of loan

It must be ensured, that applicant is trustworthy and will use the loan properly, through loan application or interview or from his/her neighbors.

d) Collateral:

This is wanted to ensure recovery of loan. Example of collateral: mortgage property, valuable

ornaments or personal guarantee of any powerful man.

e) Financial benefit from loan usage:

How much net income will exist after meeting  all the expenditures for the purpose for which

loan is wanted, should be examined. For landless and marginal farmers: how long s/he will

be engaged in work using the loan-is the consideration.

Mostly all rural credit institutions consider the above points. Moreover, cooperatives and many other institutions look for the past repayment history  Risk of rural credit:

There are two types of risk:

                                           1) Lender’s risk

                                           2) Borrower’s risk

Lender’s risk: The followings are the risks of the lender:

                        Inflation may reduce the actual value of the loan.

                        Problem in loan repayment.

                        Loan may be bad.

                        Relationship between lender and borrower may be disturbed.

Borrower’s risk: Borrower may face the following risks:

                        If lender does not record repayment properly.

                        If the loan cannot be used on elements (raw materials, machineries, fertilizer, seed, pump etc.) for scarcity in the market

                        Unavoidable misuse of the loan for any accident.

                        Loss of the loan amount before using, when in home.

                        If the borrower does not achieve estimated financial result.

                        Disturbance in using the loan for natural calamity.

 Essential characteristics of effective rural credit system

Properly planned and managed rural credit system can do well both for the lender and borrower. ‘Mr. Tardy’, rural credit expert tells some characteristics that are to be followed for the effective system. Those are:

1)          Credit in accordance with usage time should be comparatively long termed

2)          Credit cost of the lender and borrower should be comparatively minimum.

3)          Adequate security must be ensured.

4)          At the time of economic depression loan installment and other conditions of repayment should be flexible on the basis of he borrower’s income and capacity.

5)          Efficient and trained loan officers should maintain credit system.

All Indian rural credit survey committee also specifies some suggestions for effective and proper credit system. Those are:

                        Rural credit system should be concerned with national policy.

                        Institutional rural credit must be proper alternative of non institutional rural credit.

                        Institutions engaged in rural credit must have adequate fund.

                        Loan officers of those institutions should be properly trained and cordial.

                        Not only the movable and immovable properties at present but also the assets or goods that will be produced in future by using the loan should be considered as collateral.

                        Financial cooperation amongst rural villagers should be developed through the system.

                         Proper monitoring must be ensured.

                        Institutions must be cautious about legal needs and interests of  the borrowers.

Now, the characteristics suggested by the author are:

                        Institutions involved with rural credit must be granting loan in a preplanned way to all areas, villagers (landless/marginal farmers, agricultural labor, small, medium, large farmers, cottage industry labor and rural businessman) and economic sectors with prefixed amount and speed.

                        Training, related to motivation and change of mind setting should be given to the employees of the institutions.

                        Risk should be minimized and for this rural credit insurance system should be inaugurated.

                        In proper time loan application granting and disbursement should be done.

                        Granted loan amount should be sufficient for proposed work.

                        Loan repayment scheduled should be considered flexible for the villagers who are very much lagging behind.

                        Importance should be posed on financial results of the purpose of the proposed loan rather than collateral.

                        Training to the borrower about advantages of proper usage and timely repayment of loan should be given.

                        Concise application and less formalities, documents should be maintained for loan granting.

                       Short and long term credit should be granted cindering the loan applicant’s current production cost and comparatively long term



Chapter 4

Indebted Villagers and Non-institutional Source of Finance

  Vicious Circle of Poverty

From historical analysis it can be seen the villagers in Bangladesh, thus, Indian subcontinent have been passing through various sorts of economic hardship for the last centuries. Minimum necessary conditions for economic development were not within the control of the villagers of this region.  Minimum conditions are:

a)       High rate of use of capital

b)      High rate of saving

c)       Education

d)      Efficienccy

e)       Technology

The villagers of this region are relatively backward in education. Though the people are highly industrious, many work like inefficient and general farmers or laborers.

The people of Indian Sub-continent are historically averse to advanced western technology. As a result, uneducated, inefficient labor and without technology ordinary production process did not help to improve the economic condition of the people of this region. Consequently, the productivity of the land and production per acre of land in this region are very low compared to other neighboring countries. Therefore, a very small proportion of income was saved after meeting all the yearly expenditure.  Even this saving is close to zero for 70 percent of villagers. As a result, this huge mass of villager are forced to take high amount of loans from money lenders and other non-institutional financial organization for following year’s agricultural production expenditure and even for daily living expenditure for the current year. On the other side, 20 percent of village who have little saving left take loan to finance long-term and working capital expenditure for the next year. Less than the rest 10% of people who have savings to invest, adopt production process on modern and commercial basis as they are relatively educated and employ advanced technology and efficient technicians. As a result the production cost is greater than the savings and for this reason some of them are forced to take loans.

Therefore, it can be observed that, as a result of supply of savings is quite less than the demand in rural areas, capital necessary for adoption of advanced production strategy is becoming highly scarce. That is why amount of capital invested is very low. And low invested capital makes low production and very low income. And if income is low almost nonexistent saving is left after meeting all the expenditure. And if low level of saving is formed then the scarcity capital for investment becomes very high. This continuation of the condition of year after year is called vicious circle of poverty.

 This miserable condition of the villagers in the Indian Sub-continent is mentioned in the Agricultural Commission (1928), Banking Commission (1930-31) etc. of the British period. Even today this same condition is continuing. This is evidenced by the very fast rising number of landless farmers. It is found in many surveys that the number of landless farmers is rising by 4 to 5 percent of the past figure. In the survey conducted by FAO in 1960 then , East Pakistan, in other word Bangladesh landless families in rural areas were 17 percent and only within 15 year that has risen to 50 percent in 1976.

  Consequence of Scarcity of Institutional Loan

In the last chapter it was discussed that institutional loan is very minuscule in accordance to need. No comprehensive survey was conducted in Bangladesh to estimate the demand and supply (especially from non-institutional sources) of rural finance. According to figures obtained from the three surveys that were conducted till today with few samples in 1956 amount of institutional finance was 5 percent. According to survey of Co-operative Department in 1965 this amount rose to 15 percent. However, after independence this figure fell to stand at 9 percent. The author’s own estimate this amount is still (1987) not more than 10 percent.

 From the above mentioned analysis one can get the entire knowledge about the scarcity of institutional loan. However, families with low saving low savings are forced to arrange loans regularly from non-institutional sources despite adverse condition for their own sake. This type of family loan is continuing from one generation to another in Bangladesh i.e. the Indian Sub-continent. Although there is no separate survey about indebtedness of villagers in Bangladesh, there are some estimates of amount of indebtedness in undivided India. Some figures related to this is given below:

Flow of Indebtedness in Villagers of Indo-Pak Sub-Continent


Although the figures of above table are not comparable perfectly due to the survey technique and sample collection still they are sufficient to draw the gradually deterioration of indebtedness of rural people.

Manner of Indebtedness in Rural Areas after Partition of India (1947)

The figures from the surveys that were conducted about the entire condition of villagers indebtedness and economic condition in this region are given below:

Condition of Rural Credit in northern division of Bangladesh


Source: a. University of Dhaka, Socio-Economic Survey Board, “Problem of Unemployment and Rural Credit” Dhaka, 1956

                        Department of Co-operative, “Agricultural Credit of East Pakistan” Dhaka, 1966.

                        B I D S “Survey of Famine” Dhaka, 1974.

Distinction between Institutional and Non-Institutional Credit

Institutional source is new compared to non- institutional but is organized. Non-institutional source works from far flung places of the village and keeps more knowledge about the rural areas. Anyway, the differences between the institutional and non-institutional sources are presented below:


4.4 Reasons for Overdependence of Villagers on Non-institutional Credit

Already, from the presented table the picture of overdependence of villagers on non-institutional credit has been shown. It is necessary to analyze why the villagers are depending on non-institutional credit decade after decade. Some of the reasons are mentioned below:

                        Inheriting poverty

                        Burden of inherited debt

                        Painful scarcity of institutional credit.

                        Illiteracy and ignorance of villagers

                        High rate of interest

                        Division of land and property by the inheritance statutes.

                        Common disaster and loss of crop.

                        Conspiracy of the money lender

                       Pressure to spend more than capacity in social functions.

                        Law suits by village cheats

                       Lower price for the produce in the market

                        Famine and pestilence etc.

4.5 Source of Non-institutional Credit

Non-institutional credit is the most important source. In the past kabuliwala, Hindu money lenders and landlords were active in money lending businss in Bangladesh. Although implement of Sher-e-Bangla A K M Fazlul Haq’s Loan Arbitration Board and establishment of 1947 Bengal Division reduced the sight of professional money lending business, it is still present strongly in some form or the other.  

The sources of non-institutional finance in given in the following diagram:


4.6 Techniques of Loan Disbursement by Non-institutional Organizations

Because the whole system is unorganized and not well-arranged within a framework, its policy and techniques for loan disbursement, acceptance of loan, repayment of loan, fixing the term of loan, setting interest rate and etc are not established on certain basis. These are set deliberately on the basis of transaction trend when it takes place. Certain current rules of loan disbursement and acceptance are given below:

                        Interest based financial loan: In this technique cash loan is given at a very high interest. In rural areas the interest businessmen set interest at 20-25% rate per month and helpless people under pressure from circumstances are forced to take this type of loan.

B) Mortgage loan: In such kind of loan the borrowers take a certain amount of loan which is much less valued than the mortgaged assets (which is 1 of 100th in many cases) from the lender by mortgaging land, ornament even household. According to the loan agreement under mortgage loan if the borrower fails to repay after the maturity, the lender gets the ownership of the mortgaged property. In this case the maturity of the loan is short-term in nature generally and the borrower fails most of the case. And the lender becomes benefited much.

(C) Dadon: ‘Dadon’ is a special method under unorganized loan system. Under this system generally the rich businessman or raw materials producer gives loan to the lower class people such as farmer, fisherman, blacksmith, potter etc. to buy the instruments needed to produce raw materials; for example, to farmer for buying harvesting cow, fertilizer, seeds, irrigation instrument etc. to fisher for buying net, boat etc, to blacksmith-potter for buying production supportive instrument. They give advance with a condition to sell their produced goods has to sell to the Dadon at a lower rate compare to market rate. Rich businessman provide loan also to the small businessman or to intermediary.

(D) Goods loan: under this system generally the rich farmer of villages give paddy, wheat, etc, as crop loan to the poor farmer at the time of their food crisis which is repaid by them at the time harvesting. But the repayment amount becomes two-three times more than the loan amount.

(E) Sell in due: sometimes the producer to rich businessman or wholesaler, wholesaler to small trader and retailer and the retailer to the consumers sell goods in due. In business it is a very populous unorganized loan system. In this case, the goods are priced at a higher rate.

 The Evil Works of the Unorganized Rural Loan Providers

It is said earlier that, most of the unorganized loan providers are old in this profession and most of them are engaged in this business to take their own interest. So, it is found historically that, such kind of loan providers acts to make well their fate. Some evil works are as follows:


  1. Make the illiterate and unaware borrower bound to give fingerprint in white paper and then they write down the amount and condition of loan as they wish.
  2. Deduct large amount as interest from the loan amount but write full amount as loan in documents.
  3. The documents of loan do not keep in order and do not give the receipt of payment in order.
  4. The borrower has to pay large amount at the time of proposal.
  5. Many times they take the documents under their control. That is, if the borrowers default they loose the documented property.
  6. They give loan at a high and compounding interest rate even at 300%.
  7. They make them bound to sell their crops, trees, cow-buffalos etc. at a very low price.
  8. They make the poor borrowers bound to work at their field or at house as a labor at a lower wage or in exchange of food.
  9. They have to pay commission to their servant.
  10. The lenders use them as their need in business politics.

 Measures Taken By the Government to Prevent the Sins

Government imposed various Acts at various times to protect the suffered rural people from the forgery activities of the money-lender. Some important of them are as follows:

                        Money-lending business controlling act.

                        Land negotiation prohibiting act.

                        Payment of previously taken loan act.

                        Money-Lending Business Controlling Act.

Government imposes the law to register the name of persons who are engaged in money-lending business and to stop the usurer business, crime. The following are some of them:

                        Loan adjustment act-1772

                        Southern farmers relief act-1879

                        usurer business act-1918

                        money-lending business act-(1930-40)

                        money-lending loan control act-1930

Land Negotiation Prohibiting Act

Money-lenders make the millions of loan defaulters destitute by taking over their land, houses year after year. To solve this problem government imposed different laws in different time. Two of them are:

The courts of words act, 1879

Property negotiation act, 1882

Payment of Previously Taken Loan Act.

As the received loan amount becomes hundred times more because of compounding interest rate and increase in principal amount 4/5th people of most village of rural area started to backward from the village economic activities. To solve this condition government impose some act and order the lender to re-impose the condition of loan based on easy installment. Loan adjustment act, 1772 and regional loan settlement acts (1938-44) are mentionable.

 Benefits of Rural Loan

The sin and demerits of sources of rural loan already explained. The dishonest unorganized money-lenders absorb the borrower in many ways. The government authority takes many measures to decrease the curse. The absorption of the usurer reach such a stage that most of the rural economist, rural expert and authority are willing to stop them. Where only 10% to total demand provide by institutional sources, it will not be good to extinct the unorganized source without ensuring alternative, some rural expert things. Another rural expert team argues that, the rural economic activities will be hampered if sudden gap occurred. So with the increasing of organized loan source the can be use in controlled way. They think unorganized has some advantages over organized sources. These advantages are as follows:

                        Surety of receiving loan hurry and in time: in this case there is a surety to get loan in time and hurry.

                        Formalities absent: the complex formalities needed in case of  organized loan is absent in unorganized loan.

                        Right amount of loan: in this case the gets how much he want as loan.

                        Unconditional uses of loan: the borrowers do not have to follow the order of the lender. The loan can be used in any account.

                        The advantages of renew of the loan: if the maturity reached the maturity, installment, interest rate etc. can be redefined or renewed discussing with the loan lender.

                        The expenses of loan taking: the preliminary expenses needed in organized loan is absent here

                        Knowledge about the conditions of the borrower: as the lender is one of the rural people having knowledge about the borrower is natural. Even he is properly aware about the actual price of the guaranteed assets.

                        The borrowers reside under the shade of the lender: although it is easy to not paying organized loan in time, it is hard to void repayment of loan under unorganized.

                        Loan providing expense is lower: as the lender is banker himself and he can decide with in a short time about loan granted and most of the time he has no employee it is less expansible than the  organized loan.

                        Distributing in time: loan is distributed in time according to the need of the borrower from this sources.

                        Interest may exist or not: some unorganized lenders provide loan without interest because of having personal relationship.

                        Financial power: the total power of giving loan of the entire unorganized lender all over the country is large.

During British rules the Indian central bank investigation committee (1931) proposes to uses unorganized lender with organized sources using cooperative society for having advantages. According to the committee’s opinion the unorganized lender will give loan only to the primary cooperative society and direct transaction will not occurred between them and loan taking members. On the other hand, Sri Sorma suggests using the unorganized lender as the agent of the village commercial banks.

 Some Recommendations to Make Fruit Full The Unorganized Loan

From the previous discussion it is found that as the organized loan is not sufficient enough distribution of unorganized loan should continue after making necessary editing. Some recommendations regarding this are-

                        registration of the loan lender making mandatory;

                        keeping the account properly and regularly;

                        avoiding overwriting in account;

                        showing the borrower the account of loan regularly;

                        giving receipt against repayment every time;

                        charging interest only yearly basis at a determined rate (interest rate can not be over 25% any way);

                        leaving the habit of taking money illegally;

                        giving the chance to repay through court if needed;

                        forbidding giving loan outside own territory

                       forbidding unnecessary harassment

                        high punishment and monetary punishment has to impose against fraud

                        Overall supervision and observation.

The government has to careful enough about whether the acts are being using rightly or not. Otherwise the acts will become paper acts only.

Chapter 5

The Sources of Organized Rural Credit

The demand for capital in rural areas is a composite demand made up of emends for different types of capital goods, which vary greatly in the degree of their fixity of performance. Agriculture and related economic activities require the following capital goods:


v  Land and its improvement

  v  Agricultural implements, machines and livestock;

v  Requisite inputs such as seed, irrigation, fertilizers, oil, cement etc.

v  Stock of food and clothing to maintain the farmer and is family during the period of production

v  Machinery and tools for rural enterprise

Realizing the severity of rural indebtedness and the need of rural poor to have access to credit, the government enacted the rural credit disbursement is nearly one hundred years ago. The government the Land improvement Loans Act (LILA) and the Agricultural Loans Act (ALA). In the first decade of the 20th century, the govern encouraged credit co-operative societies and land mortgage banks. These institutions were expected, among other things, to provide credit in small amounts to the rural people. Serious attention to credit programs for small farmers was given by elected government of bangle in the late 1930s. The passage of the Agricultural Debtor’s Act (ADA) and the Money Lender Act (MLA) in 1937 and 1938 respectively, imposed restriction on the activities of rural money lenders who had traditionally loaned money to the poor. To offset this government began providing Taccavi loans to the poor in the rural areas. The government also added the Co-operative societies Act in 1940 and increased the number of loan mortgage banks to facilitate the availability of credit. The Department of Rural  Reconstruction and Debt Settlement Boards helped small farmers to survive from the onslaught of moneylenders.

Classification Of Rural Credit: based on sources

On the basis of different kind of sources, rural credit can be divided as following:

Historically, in Indian subcontinent, it had not given importance for the economic and social development in Bangladesh for the lack of proper stepping of the government. After the partition, before 1971, the only organized sources of rural credit were very weak co-operative structure and Krishi Unnyan Bank which activities were restricted. After 1971 for the rural credit supply, government took initiative by three ministries under its branches. The three ministries   were: Ministries of Finance, Ministries of LGRD and Ministries of Agriculture.

Very small amount of rural credit are supplied by the organized sources in our country. But it is true that the rural village farmer will no more exploited as the organized supply increase.

Camilla model “which introduced by Akter Hamid Khan in 1963-64 is a successful co-operative research and was new addition in two layer co-operative in whole country. Local government conducts three layer co-operative activities under rural development ministry, In this process Bangladesh co-operative bank provided the fund to the top layer and that fund reach to the lower primary co-operative society by middle layer central bank or society. Primary layer co-operative societies only give loan directly to the rural people. On the other hand, under the same ministry Rural development board involved conducting two layer co-operative activities. In this process Upozila central co-operative society collect fund from Sonali Bank and provides loan able fund to primary agricultural co-operative societies to distribute rural people.

On the other hand, under finance ministry, Bangladesh Krishi Bank and Nationalized commercial banks which involves giving rural credit and most branches of he banks located in rural area.

Moreover, some branches of the banks are located in urban area to collect deposit and to increase loan able fund of rural credit. On the other hand, under the indication of government and Bangladesh Bank, National Commercial Bank opened rural branches and in some semi urban areas braches open rural credit department to conduct rural credit activities directly. Grameen Bank is the latest organized addition to provide rural credit. The attractive future of Grameen Bank is to give loan to indigent and poorest women workers for self-employed and income generation under close monitoring.

The organized sources of rural credit in Bangladesh at a glance:

Organizational Sources of Rural Credit of Bangladesh

Rural Credit


These organization are providing credit at higher rate after liberation than before liberation.

Taccavi Loan

The eldest organized source of rural source of rural credit in the Indian subcontinent is Taccavi loan. Government disburse loan to the rural people in time through its revenue board by the Taccavi Law 1871, Land Development Law 1883 and Farmer Loan Law 1884 is called Taccavi Loan as a whole. Comparatively long term Land Development Loan providing according to the Land Development Rules taking collateral as tangible assets.

Taccavi Loan is provided for the following purposes:

Ø  For digging well, ponds and irrigation canals.

Ø  Building warehouse.

Ø  Leveling land for cultivation.

Ø  To make land cultivable.

Ø  To control flood and making barrage.

Reasons for unsatisfactory recovery of Taccavi loan:

Ø  Lack of close monitoring of objectives and utilization of loan.

Ø  Misuse of loan in unauthorized sectors specially in consuming.

Ø  Fail to identify to real rural poor people.

Ø  Illegal practice of government employees/officers related with Taccavi loan.

Ø  Lack of sufficient principle to recover the loan.

Ø  Fail to make loan recover schedule in time and take action.

Ø  The tendency of exemption on expired loan by govt. so that the Taccavi loan borrower feel no interest to pay the loan.

Ø  Fail to maintain the loan record in proper way.

Ø  National calamity specially flood heavy downpour, drought etc.


In our country it is seen that rural credit disbursement of the organized source is very unsatisfactory. As a result the rural people bound to go to the unorganized sources where they have to pay more for the loan. Even some rural farmers have been made quit. The government has to take initiative.    

Chapter 6



Co-operative means moving together of people with similar mentality. Co-operation is also very ancient concept like human civilization. Living together in a family of Indigenous people is the historic nature of co-operative. There are direct & indirect out come of success in all ancient & modern religion and slate activities of the world. Unity & taking collective activities for the same purpose is the key to co-operative.

Therefore, we mean Co-operative is the group of people formed base on the mutual understanding which does the financial & other benefits of it’s member.

Ideal of Co-operative:

Co-operative is established on some ideal accepted by all like any noble work. Organization without ideal is vanished in the near future. Ideal of Co-operative are as follows:






Features of Co-operative:

Main features of Co-operative are as follows.

Generally ownership is not limited and membership is open for all.

Democratic Controlling, Only one vote for one person.

No transaction of share & no fluctuation of price.

It considers the merits & demerits of personal life of member and it create proper market system for increasing production and fair price of produced goods.

Co-operative orders for self dependence through savings, deposit & habit of less expense.

It plays neutral role in case of religion and politics.

Principles of Co-operative:

Raifengen was German specialist who invented a special type of Co-operative system. His invented Co-operative principles are as follows:

Joint and Unlimited responsibility.

Limited area

Only member has right to get loan.

Providing loan on the basis of personal collateral of members.

Operating activities of office by the members without any payment.

Keeping surplus portion of joint business into reserve fund.

Important features of constitution

Important features of Co-operative Act-1904 are as follows.

1.       Any 10 rural people living in a same village can form a Co-operative.

      2.       Co-operative may be rural or urban on the basis of area.

3.       It operates activities in limited area.

4.       It can give loan only against personal collateral of members.

5.       Annual Audit is compulsory.

6.       Formed Co-operative may be given exemption from registration cost, Stamp cost and Income tax.

7.       Register has been appointed providing sufficient power of controlling and Co-operative.

Co-operative Structure:

Co-operative in Bangladesh is operated under Co-operative, local government and rural development ministry. Two types of Co-operative is operated under two department of same ministry. Some one indicates as traditional Co-operative department and combined Co-operative which is operated and rural development department. Three tier Co-operative exist in traditional system and two tier Co-operative exist in system.

Co-operative in traditional system:

In traditional system, Bangladesh Samabay bank work at the top level and primary Co-operative society works at the bottom level. Another tier central Co-operative Bank communicates among this two tier. In traditional system Co-operative structure is shown in below:

                        Bangladesh Samabay Bank

                        Central Co-operative Bank

                        Primary agriculture Co-operative society

Bangladesh Samabay Bank:

Bangladesh Samabay Bank is established on 31st March in 1948. Then its name was East Pakistan Regional Samabay Bank. In primary stage, it started with one crore taka capital but now it’s authorized capital is ten crore taka. Let’s have a glance in the financial particulars of this bank:


Bangladesh Samabay Bank acts as a bank of regional and central bank by collecting fund from Bangladesh Bank and sanction loan through regional and central Co-operative.

It helps to bring Co-operative loan in financial discipline.

It communicates among various types of Co-operative.

It helps in marketing of produced goods of members of primary Co-operative by sanctioning loan in building warehouse.

To determine the amount of annual loan of traditional Co-operative of the country.

To give advice about other matters time to time.


There were about 100 members in 1960. But it increased up to 389 in 1985. All of the central cooperative banks of the country are the members of it. Besides this, Upazilla central cooperative association and Central Bohumukhi Cooperative Society are the members of it. The number of members in the years 2002 to 2005 is given below:





Number of members





The members in 2004-2005 are classified in several types:


Member Bank/ Types of cooperatives



National Society (Jatiya Samiti)



Central Cooperative Bank



Upazilla Central Cooperative Bank



Central Multi-Purpose Cooperative Society



Central sugarcane farmers’ cooperative society



Fishermen cooperative society



Cooperative land-mortgage bank



Town/poura cooperative bank and society



Union multipurpose cooperative bank society



Upazilla cooperative bank



Bangladesh Government






Dissolved/Liquidated Banks and Societies






The management of Bangladesh Samabay Bank from 1948 to 1954 was on the working committee. Then the name of working is renamed Directors Board. There were 18 members of this board. Manager in general of bank is the main executive. Two deputy manager in general help manager in general. The main activities of bank were divided into five categories such as account department, loan sanction department, administration department, loan recovery department and loan monitoring department.

According to the Cooperative Society Act 2001, from the 12-member management board, two-thirds of it (8 persons) must be determined by the direct votes of the shareholders.

Fund Collection:

Without paid up capital, every year bank deposit a certain portion of profit into reserve fund. Besides this, Bank collects deposit from member and other client. But the main source of Bank fund is Bangladesh government or Bangladesh Bank which gives various term loans to bank aim in to providing as loan. Tm 1995-1996, the accepted loan from Bangladesh Bank was the 80% of the total capital of Bangladesh Samabay Bank. But at present it has become 90%.

Disbursement of credit:


Problems of Bangladesh Samabay Bank:

Bangladesh Samabay could not achieve result at desirable rate. Because it is involved various weakness and problems. The problems which obstruct Bangladesh Samabay Bank to achieve its goal are as follows

A. Organization Related Problem:

Disturbance in regular activities having no local Branch.

Since upper level Officers are the employee of Government or Bangladesh Bank, they have less interest towards institution.

Existing dishonest and cunning members in directors board.

Scarcity of employee with enough training and proper degree.

B. Assets Related Problem:

Scarcity of loanable fund as per demand.

Amount of collected deposit is very limited.

Amount of share capital and reserve is very limited than demand.

Investment of greater amount in sector excluding loan.

C. Loan Sanction Related Problem:

As no opinion of loan applicant and field worker is no received, various problems arise while implementing it.

           The amount of loan per family or per acre is very limited than necessary

There are rules to exist of agent Co-operative department at the time of considering loan application. Such employee as most creates pressure to give loan to their favorite applicant.

Loan Recovery Related Problem:

1.       Lack of loan monitoring.

2.       Lack of trained officer for loan monitoring.

      3.       Since the amount of share and reserve part is very small, they have no eagerness in developing the institutions.
      4.       No arrangement of eagerness  creative gift in repaying loan in right time
       5.       Negative impact of exemption of default loan with political purpose.

6.       Long method in taking legal action against loan defaulter.

E. Others Problems:

Regular audit is not done by qualified auditor.

Arising from lack of Co-operation among various institutions working in the same area.

Central cooperative bank (CCB)

Central cooperative bank taken placed in the middle of the ancient cooperative methods. This society/bank maintains correspondence between the Bangladesh cooperative bank and lower level primary co-operative societies.

Role of central bank

Central cooperative bank does the following roles-

1)       Provide essential information about rural economy to finance primary cooperative society in time and deliver Bangladesh cooperative bank fund to the primary cooperative society for loan purpose.

2)       Central cooperative bank makes correspondence to the Bangladesh cooperative bank for collection of credit fund.

3)       CCB store and maintain valuable checks, bills, documents as well as deposits for the members

4)       CCB make balance to role of credit.

5)       Transfer excess funds to the deficit members are another role of CCB.

6)       CCB play leading role for the compromise when collision, disputes etc. among the members of the societies.

7)       CCB examined the accounts of their circumference primary cooperative societies.


CCB operates by the six elected executive officers. These executive officers make an assembly which members are called directors. One of them is elected for chairman and other is vice-chairman.

Area of central cooperative bank


 There are two types of CCB members. One of them is person and other is society. Besides agriculture loan society marketing society, consumer product society, agriculture society can also be a member of central cooperative bank.


 The major fund of CCB is share capital, collected deposits and loan from Bangladesh cooperative bank or approval from Govt.


On the other level of cooperatives, CCB results not satisfactory. To evaluations, total sixty seven CCB but not one of them has excess net assets over their liabilities. Most of them depend upon to the govt. approval or Bangladesh cooperative bank for 80% of their current deposits. In past information, most of the case CCB give loan as well as invest to the primary cooperative societies based on borrowed amounts and their amount of over limit time credits are out numbered.

Weakness of CCB

From the previous discussion and perspective it is clear that the CCB not operate as well as administered in as satisfactory levels. Because they have some weakness or problems whish cannot be tolerable. These ares-

1)       These banks are spread in scatter and their control procedures more relaxed.

2)       Executive officers are not efficient enough to operate the banks.

3)       Lack of adequate efficient trained employees.

4)       Not proper management for loan supervision.

5)       No major steps taken for deposit collection

6)       Most of the time their tendency to operate activities based on borrowing.

7)       There is no any secured place for keeping collateralized properties and often these properties are destroyed.

8)       Often there is a tendency to showdown documentary transaction rather than genuine loan recovery.

Primary multipurpose cooperative society (PMCS)

After the division East Pakistan, there is huge number of primary agricultural cooperative society (PMCS) is established. But most these types of small cooperatives recover by the dimension of lack of finance. This is why, in 1959 with the recommendation of “Loan supervision”, established multipurpose cooperative society in each union.

Major objective

Major objectives of PMCS are as follows-

1)       Arrange short term and medium term loan to the members

      2)       Provide agricultural elements consumable goods to the members

3)       Confirm marketing of producing goods of the members


For the purpose of administering the primary cooperative society’s management, one person elected as chairman by the members for a specific period and two persons are employed as assistant chairman to assist the chairman.


Like others bank, this bank has also a specific fund. Most of the funds come from member’s fees, reserves, member’s deposits and loan taken from the central cooperative bank.


Though they are multipurpose cooperative society by name yet they were engaged in general auricular loan. As their past activities were not enough to indicate so there was a plan for a new cooperative society.

Farmer cooperative society/ upazilla based cooperative association


Purposes of agriculture cooperative society are as follows-

1)       To increase crop production, provide electric motor, agriculture equipment, insect killer machine, seeds, and fertilizer as loan.

2)       Direction and maintenance of provided agriculture equipment, electric motor, power tiller, tractor, insect killer machine.

3)       Make uncultivable land cultivable and arrange water pump from pond by taking lease.

4)       Arrange purchase, maintain and marketing of produced crops.


Main activities of agriculture cooperative societies are as follows-

                        Collect agriculture equipment, power pump, power tiller, tractor, motor, fertilizer, insect killer machine at a whole sell rate from any organization or government.

                        Doing banking business with civil society, help them financing and timely take deposit from them.

                        Selling producing crop to the cooperative society and sign contract to purchase and provide essential goods.

                        Take different initiative to provide them electric motor, power tiller, seeds, fertilizer, agriculture equipment, tractor, insect killer medicine.


Executive committee is formed by the member of the society. A chairman and an editor are elected from that committee. A manager is also elected to assist the chairman and editor.

Loan distribution

A meeting is called for loan distribution by the executive of the farmer cooperative society after getting money from the central cooperative society. Loan is distributed at the office in front of others. At the time of distribution of loan, employee suggest to proper use of the loan.


Agriculture cooperative society under cooperative department has extended in last thirteen years. By this time borrowing of the society from the bank has increased but loan distribution has decreased.

Upazilla central cooperative associatio

Upazilla central cooperative association is formed with all the farmer cooperative association under an upazilla. This association makes coordination among its members and agriculture cooperative society.


Management activities are done by a group of elected directors. Among these members a chairman and a vice chairman are employed. They are elected for a specified period of time.


Funds are collected from the member’s fee, deposits, loan of members and from the primary cooperative society.


Cooperative land mortgage bank

At first cooperative society helped villagers in their economic activities by providing them short term and medium term loan. But they failed to achieve their expected result for want of long term loan. As a result in 1930 central bank searching committee and other banks request to establish to solve this problem. Expertise comments it may be a cooperative based, partly cooperative based or joint stock based. In this way cooperative land mortgage bank was established in 1930 in India.


Keeping the national land mortgage bank in top position, primary land mortgage bank is executing their activities in every district. An assistant register of cooperative department look after this land mortgage bank. There is an executive committee to look after the activities of the bank. There are 6 to 10 members in an executive committee.


Top cooperative land mortgage bank raise funds from member’s fee, donation, deposits, and reserve fund etc. non members person can also sell shares and debentures to the society.


Main purpose of land mortgage bank is providing term loan. There are other activities such as –

                        Provide loan facilities to repayment of previous loan.

                        Provide loan to purchase nearest land of farmers land.

                        Provide loan to recover the tangible mortgaged asset.

                        Selling debenture to increase funds.

                        Capital formation to assist village savings.

                        To protect villagers from the oppressive money lender.

                        Provide long term loan for modern agro production equipment, land improvement, pumping etc in easy terms and condition

Method of providing loan

Borrowers have to fill up two forms at the time of loan application; one form is to be civilized and other is loan application form. First type of form should cover the information about the immovable property, liability statement and annual income statement of the applicant. There is several part of the second form. Such as-

Part “ka”- quantity of land, ownership etc of the mortgaged property.

Part “kha”- purpose the loan applied for.

Part “ga”- present condition of the primary cooperative in which the applicant is belongs to.

      Part “gha”- Description of   non secured property

Besides this there are another two part-

              probable income from the mortgaged property and

                The income and expenditure statement of the whole family.




By filling up the application form properly with the above mentioned information, application form should be submitted in bank. Then investigation officer examine the eligibility of the applicant. After that one investigation officer personally investigate in the sub registration office whether the mortgaged property are liable or not. If the loan is sanctioned, applicant is given order to become under contract by purchasing a non judicial stamp. Rules and regulation of loan repayment is inflexible. If any one default in payment of installment and default more than two times, then bank can demand the principal amount along with the interest at a time. If defaulter does go under mutual negotiation with the bank then bank can recover due by selling their mortgaged property in auction.






At present there are 19 cooperative land mortgage banks in Bangladesh. But there is no contribution on rural economy of these banks by providing long term loan because of structural weakness or lack of funds.

Problems of traditional cooperative society

Our cooperative bank/society faces various problems in their operations. Major of them-

1)       Six principals of cooperative which was internationally approved not followed properly in Bangladesh.

2)       Current cooperative laws not enough for controlling the societies.

3)       Among the other cooperatives, only agriculture credit cooperative societies are currently active.

4)       Lack of adequate amount of short term and long term loan for the cooperative societies.

5)       Not proper management for loan supervision as well as cash credit for supply of productive goods.

6)       Inefficient and completive management caused delay and inadequate loan supply and distribution.

7)       Lack of training facilities and remunerations for the employees.

8)       Lack of knowledge and technical efficiency to manage and operate the activities of the societies and employees.


Chapter 7

Bangladesh  Krishi Bank

Project Assessment/evaluation

The investigation officers or the field inspectors those who are in charge or working in the branches of Bangladesh Krishi Bank (BKB) are in charge of project assessment. If the investigation officer is not available, the field inspectors do the work of assessment on behalf.

The steps of assessment of short term loan (project) are given below-

  1. A farmer meeting is arranged before every agricultural season in union level, where level of agricultural loan (declared by the ministry of agriculture) is announced.
  2. The same type of meeting is planned to be arranged in each ward of a union.
  3. The field inspectors prepare the list of village wise potential borrowers during the ward meeting with references of the Union Council Chairman or the associated members.
  4. The name of the loan defaulter farmers are deducted from the new list.
  5. The field inspector visits the village with the list of potential borrowers and the application form for loan, and helps them to preparation and submission of the form and other documents.
  6. In the find stage the application form for loan is submitted to the nearest branch manager of BKB along with the other supportive documents and inspector’s won remarks.
  7. Then the sanctioned loan is distributed to the farmers in front of the union council Chairman and members, loan in the form of goods are distributed with a credit voucher.
  8. The list of the borrowers and the same amount of money borrowed is again submitted to the respective branch with the signatures of the field inspector, Chairman of the respective Union Council and members.

Steps to evaluate short term projects: BKB grants mid and long term project loan. These projects are evaluated in the following manner-

                        Application for loan is first sought from the farmers having 15-20 Acres of land.

                        No amount is needed to be paid to the applicant in the first phase.

                        The applicant usually offers the place to set up the shallow tube-well.

                        The branch then examines the borrower’s worthiness and past history of loan payment.

                        For further investigation the branch manager sends the field inspector to the village. The inspector submits his inspection report to him with proposed deposit, ownership, financial prospect, nature of proposed crop, and self assessment of earning in a prescribe format.

                        Loan is sanctioned bared on the above assessment report and the borrower is invited to sign the agreement paper with supportive documents.

                        Equipment bought on loan amount is to be pledged in the form of fixed asset. This is value is counted as first 50% of the amount and 133 taka for each 100 taka value.

                        Then bank gives order to the listed contractor to install the tube well or the respective equipment

                        The contractor then submits the report to the bank with the full consent of satisfaction of the borrower.

                        Then the contractor is paid by check by showing it debited to the borrower’s account.

Loan Supervision

BKB have an investigation officer and a field inspector in its every branch for loan supervision. Their main duty is loan evaluation, inspection and loan collection. Every branch does not have both type of officers as the number of branches has increased rapidly. An investigation officer or a field inspector submits report of new borrower in the number of almost 400 every year, at the same time they supervises almost 600 current loan account.

Loan Distribution

BKB is helping the poor farmers by giving loan in lower interest rate from its inception. In the year of 1984/85 this bank sanctioned loan of almost 614.73 Crore amount its 11.15 lacks borrower. From July 1985 to March 1986 sanctioned loan by the amount of 365.06 Crore.


a)       Production loan Vs Investment loan : Production loan is disbursed for the period of less than one year, where as investment loan is disburse for up to 20 years.


The above mentioned information reflects that, before liberation BKB monthly sanctioned Investment Loan (almost 56%). After liberation (up to 1981) this loan reduced to 39%. The possible reason for this is the 100 crore special agricultural loan project which was distributed with special emphasis

        b)Objective oriented loan disbursement : BKB generally distributes loan for following objectives-

Short term loan:

                          I.      Crop production (excluding tea

                        II.      Irrigation

                     III.      Agricultural equipments

                     IV.      Live stock

                        V.      Poultry and live stock farm

                     VI.      Fishery

                   VII.      Transportation for marketing

                VIII.      Cottage industry based on agriculture

                     IX.      Others.

Long term loan:


                        Mechanization of agriculture

                        Agriculture based industry

                        Tea garden development


Sectoral Analysis: Sector wise loan disbursement –

The sector wise loan disbursement of the financial year 2001- 2004 is showed below –


The above information reflects that the number of borrower and loan amount up to 1000 tk has decreased rapidly. The possible reason for this is for the restriction in deposit the small and poor farmers can not avail much loan and for the effect of inflation required input is hard to collect in respect of small loan. Where as borrower and loan amount of large amount are increasing in numbers. The possible reason behind is BKB is sanction large amount loan much for agriculture related industry, like small industry and vehicles.

Distribution of Loans According to Size of Loans for the Year 2001-2002



a)       Size of land and loan: Loan facility of BKB is mainly limited among the farmers having land of 2.5 acres to 12.5 acres. At the same time the amount of loan disbursed among the landless and small farmers is not insignificant at all.

b)      Loan distribution based on deposit: 96% of total loan distributed by BKB (June 1985) was made against the 3 types of deposit. They are fixed asset (58%), goods pledge (9%) and other deposits (29%). It is clear that land based deposit is the safest security for the BKB still now.


Loan Collection

Incensement in the flow of agricultural loan depends its appropriate collection. Relaxation in collection heavily affects on the wealth, profit and liquidity of the bank, it hampers the system of agricultural loan in respect. For this bank should continue its activity to proper loan collection.

Responsibility of collection primarily rests upon the hand of the branch managers. He along with his staffs determines the suitable policy and strategy of collection so that the yearly target of the branch gets fulfilled. Branch manager consults with the regional manager and considers the crop collection in determining the policy of collection. In this matter loan collection pass book system is maintained. A notice is given before the designated date of collection. Legal notice is given keeping more 30 days ahead. If the borrower does not response even after then notice for taking action is issued as the first step. Union council chairman and the members are notified to this matter as the second step. In the third step TNO is notified to this matter. Deputy commissioner is notified regarding the issue in the fourth face. If all steps fail, the issue is put in to court.

Bed debt of BKB is now standing in a very vulnerable point. Ratio of collection is very poor. Following chart reflects this:



Possible reasons for Bad Debts

The increase in bad debts of BKB did not take place in a day. There are many reasons behind this. There is not only one reason made this situation today. The following reasons are more or less liable for today’s vulnerable position:

                        One of the main reasons for bad debt is the borrowers default before liberation is shown in the account of the independent Bangladesh, whereas most of those defaulters are now in Pakistan.

                        Natural disasters like flood, draught, heavy downpour, cyclone and other calamities cause harvest loss and causes failure to the farmers to pay debt.

                        Loan sanctioned to the people not related with agriculture, as a result bad debt increases.

                        Some of the farmers borrower agricultural loan but spends it in non agricultural sector, so when time comes to collection, they fail to comply.

                        Some dishonest persons take loan form BKB and gets relax in payment of it. To them BKB is a governmental bank and it does not need to get its loan paid back.

                        Some of the borrowers of BKB are really poor farmers and for their poverty they fail to pay back the loan in real sense.

                        BKB some times grants loan for village development purpose, which ultimately does not, gets paid.

                        By the order of the government BKB sanctions loan in some unproductive sectors, which increases its amount of bad debt.

                        Some times government intervenes in profitable business by BKB, because it could hamper the social responsibility.

                        BKB grants loan against the security of loan, but land most of the times can not pay the principle and interest in total.

                        Misuse of power by the political leaders and other influential people lets BKB to sanction loan to them, which in return turns into bad debt.

7.12 Reserves against Doubtful Debt

Bangladesh Krishi Bank maintains reserve at a small size against no recovered and doubtful debt. But this reserve is very small in size in comparing to unrealized debt of each year. From the profit of the year 2004 Tk.5992089463 is kept for this and for 2005 Tk.5428885487.

7.13 Profit & Deposit in Government fund

Net profit of Bangladesh Krishi Bank in 2004/05 is Tk. 184400960. Achievement of this net profit is possible for expansion of loan activities that means overall banking activities of this bank. From fiscal year 2003/04 to 2004/05 Bangladesh Krishi Bank deposit Tk.1305263443 in national reserve in each year.

7.14 Balance with Other Organization

To achieve efficiency in bank management Bangladesh Krishi Bank balances its activities with other government & privately owned organization. To remove the imbalance of activities this bank balances its activities with Bangladesh Agricultural Development Organization, Bangladesh Small & Cottage Enterprise that are related with agricultural & rural development. For this balancing, bank funds are utilized properly of national objective increases at higher rate.

A list showing the balances of BKB with different institution





Balance with Bangladesh Bank & Sonali Bank



Balance with Other Banks & Financial Institution



7.15 The Main Problems of Krishi Bank in Bangladesh

Bangladesh Krishi Bank is the main institutions in providing sources of money for rural area in Bangladesh. It contributes in developing the economic conditions of million landless & poor farmer of the country. But there is lots of problem & obstacles in this sector, which cannot solve through limited resources of the country.

The main problems of Bangladesh Krishi Bank are given below:

                        Limited Resources: Bangladesh Krishi Bank has very low amount of monetary asset compare with need. Because the bank has to work on the fulfilling the needs of most of the people. The savings amount & the money lend by the govt. is not enough for this.

                        Lack of Skilled Manpower: There is eagerly need of skilled, educated & spontaneous manpower as the development of agriculture & credit is full of problem & a critical matter. But there is lack of skilled worker & employee in the Krishi Bank.

                        Inadequate Branches: In this day, there are about 898 branches situated in village among 997 of Bangladesh Krishi Bank. But there is about more than 85 thousands village in the country. So there is need more branches for fulfilling this.

                        Failure in Project Analysis: In the project credit, as there is lack of skilled people the term like trade, economic, administration, marketing, social etc. are not able to analyze properly. For this reason the most of the project fails.

                        Late Payment in Credit: The farmers get the loan lately because of mismanagement of the employee. So they are also in able in using materials to buy for their land.


                        Need for Proper Guidance: Although the bank knows the benefit of proper guidance, but for some reasons the bank cannot apply this policy & the credit is given on the basis of mortgage. But now a day, there is followed policy in some area.

                        Lack of Following Proper Rules of Credit: The working people are not active enough in following the rules in giving the credit. Also not follow in taking back the credit. And the bank can’t take proper action against this because of some political pressure & other cause as well.

                        Lack of Proper Encouragement in Giving Credit: There is weakness in bank’s policy procedure for making encourage in giving bank credit by the Krishi Bank’s employees.

                        Wrong Promotion Policy: In giving promotion there is not considering the main things like the employers, their skill ness & to complete the work in time. For these reason, the employers are worked on the so called & old version working environment.

                        Lack of Effort in Working in Rural Area: Bangladesh Krishi Bank is based on rural area, which most of the works is surrounded by the rural people. But for the rural infrastructure & underdeveloped living style, the employees are discouraged to work in rural area. This breaks the normal rural banking work.

                        Influence of Rich & Powerful Person: The large portion of doubtful debt is the rich & powerful person. For unknown reason, the bank can’t force on them for giving the loan amount.

                        Inadequate Training: Although there are 3 training centre in Bangladesh, there is lack of adequate & fruitful working skill on bank’s employees.

                        Huge Expense in Administration: Huge amount is expended in operating the banking work & in official work.

                        Credit Problem in Foreign Goods: The bank takes credit from foreign organization for goods but most of the time this does not possible to use in the favor of country’s economic based for some tactics reasons.

7.16 Remedies to Overcome Those Problems

As the activities of Bangladesh Krishi Bank are vast & complex it faces so many problems. But it is impossible to solve those problems as early as possible.

By solving following steps current problem can be solved:

v  To increase the asset of the banks by increasing banks deposit. For this different steps are taken like deposit pension scheme. It is also necessary to improve the quality of customer service & initiate the employee to improve the deposit.

v  Bad debt of bank should be lower at any cost. For this loan collection principle should be improved, also be specific & strict. At time of determining the principles crops collection period should be given first priority.

v  For increasing the banking activities in rural area & to serve those to maximum farmer branches should be expanded at a higher rate in rural area.

v  To improve the banking activities it requires skilled, experienced & active manpower, for this it should get priority at training of employee.

v  At the time of providing project loan banks should give importance at commercial, economic, organizing, social & efficient side of the project.

v  Provide necessary equipment to skilled & experienced borrower who takes loan for productive purpose.

v  To make the proper utilization of loan by the borrower at right time all types of excessive official activities should be removed.

v  Supervision of loan should be got priority in exchange of taking the land as security. It is also necessary to keep watching that the borrower should make the better use of loan at right time.


v  Promotion principle should be dependent on efficiency, qualification of employee otherwise employees avoid more labor work.

v  As Bangladesh Krishi Bank is village-based bank so it should get more importance on rural activities, for this more manpower should be employed in rural branches. Restriction should be imposed on employee to live in rural area, in some case employee should be awarded for this.

v  Credit principle should be improved as Bangladesh Krishi Bank is for farmer & landless poor people so it need to looked after that rich & powerful people should not get maximum amount of loan from this bank

v  Bank management expenses should be minimized as possible otherwise bank activities are affected for lacking of fund.

v  Bank account statement should be maintained properly & audit of account should be maintained in each year.

v  Strict principle should be taken against the misuse of bank fund & asset. 

Chapter 8

Nationalized Commercial Bank

8.1 Historical Background

Commercial banks give loan especially financial support up to last two-one decade to prove their logic of name. For the sake of national economy Commercial banks started to give assistance other than business need but most of them was urban area based.

In Pak-Indian subcontinent organized rural loan is provided firstly, by the government with takavi loan, then by the three folded cooperative society, then by the two folded cooperative society and finally by the specialized rural bank. But as the number of landless increases rapidly the crisis of savings or investment increases and as the investment increases more for the implementation of modernization of agriculture the organization engaged in rural loan disbursement providing vary small amount of loan. As these institutions have lower loan-able fund, trained professionals are smaller and technologically weak, they can not increase their skill and amount of giving loan in spite of having demand, and as a result it is necessary to use more qualified institutions like the commercial bank. In this way the first bank of the subcontinent (State Bank of India) enters to the rural loan. After the independence of Bangladesh the commercial banks made nationalized in 1972. At this time higher professionals of the authority recommends the commercial banks to operate their business to the rural area to bring out the economic activities of the war exploited village Bangla in to right way. At this time in 1973 Bangladesh planning commission also point the same things. The expert team thinks that, for being unskilled and economically weak the government organization may not provide expected result in rearrangement of money. In this year that is in March of 1973 the decision of acting activities in rural areas by the nationalized commercial bank is taken in the conference of agricultural loan organized by the Bangladesh Bank.

In 1974, the next year the report on rural loan analysis of World Bank and International Development Association (IDA) recommend the nationalized bank to give loan in rural areas without avoiding other sectors.

The banks started their banking activities in rural areas slowly as the rural areas are unknown and unfamiliar and there are lack of trained employee. The largest nationalized commercial bank – the Sonali Bank started to give rural loan through IRBD in august 1973

The expansion of activities in rural areas by the commercial bank from year 1972 to 1977 was very slow. So in 1977 the then president of Bangladesh Ziaur Rahman take special agricultural loan arrangement of Tk. 100 crores and fix up the annual loan amount for every nationalized commercial bank and commend to expend branch in rural areas and giving loan. The nationalized commercial bank started to provide loan actively after this commend.

8.2 banking system of Bangladesh based on financial activities

It is necessary to know the importance of sector wise loan of total banking system before discussion about the activities and success of nationalized commercial bank in rural lending. Although the nationalized commercial banks are the large partner, agriculture bank, Silpa bank, even cooperative bank also are the partner of total banking system.

According to the account of national production and income larger partner of national production and income is agriculture and agriculture related financial activities. So these activities are entitled to get more financial assistance from the government banks. But the statistics of loan utilization of total banking system shows that rural areas (agro based) still not getting importance. The following statistics show this:


The above information shows that, although the agriculture and agricultural activities gets the highest priority it was at 3rd position up-to 1979 according to getting bank loan. This condition has improved in 1985 as the supply of loan in this sector increased

8.3 The tradition of rural and urban activities of total banking system of the country

From 1975 the deposit and loan activities of total banking system are doing based on rural/urban area. The deposit and loan ratio of ten years from 1975-1985 are as follows:

(in crore taka)




a) Total deposit

    Rural areas deposit

    Rural deposit to Total deposit (%)

b) Total Bank Loan

    Rural loan

    Rural loan to Total Bank Loan (%)

c) Loan-Deposit ratio











1 : 0.80

1 : 0.33

1 : 0.84








1 : 0.95

1 : 1.57

1 : 0.82

From the above data it is proved that, the total banking system turns to the rural activities in last ten

years. Both village deposit and loan increased satisfactorily. But the rate of increase of rural loan is four times more than rural deposit, the most important matter is that where in seventies the saving of rural areas were transferred to urban areas, presently the excess savings are transferred to rural areas.

8.4 The activities of nationalized commercial banks in rural areas

Presently a general manager of every nationalized commercial bank is in duty to supervise the activities of rural lending. Two or three deputy general managers are to help them. Loan planning, distribution and recovery are performed by different general manager. One employee is in every bank to evaluate the loan activities and to collect necessary information on loan from different branches. There is one deputy or assistant general manager to supervise the loan activities of every division or zone. The manager of rural branch can approve most of the crop loans but he has to get permission from the regional manager if the loan amount is of large amount and of long term.

8.4.1 Loan able fund

Rural deposit is the main source of rural loan. Sometimes Bangladesh Bank refinances to give loan to special crops or to special clients. Sometimes foreign aid received by the government or Bangladesh Bank to provide loan to special projects.

8.4.2 Branch Expansion

To ensure continuous activities the expansion of branch of nationalized commercial banks in rural areas is necessary as early as possible. In past most of the branch of banks was established in urban and semi-urban areas. The Bangladesh Bank that is government pressure frequently to expand branches to rural areas and make it mandatory to open at least several branch in rural areas to open a branch in urban areas. As a result, after the liberation the number of rural branches increases year after year. From the data it is found that in 1971 the number of rural branches of nationalized commercial banks was 412 which is above 35% of total branches. For well organized and planned steps the number of rural branch reach to 3453 in 1986 which is 67% of total branches. It is a admirable tradition infect. The following table shows this in details:

Rural branch of commercial bank

Trend of expansion (1971-86)

Year (completed in Dec.)

Rural branch number

% of total branch


















































From the above data that, before 1977 most of the total bank branch was centered in urban area. But after 1977 for having strict law of Bangladesh means Bangladesh Bank the rural bank branch becomes more than 67% in 1985. This success is acceptable no doubt. But as the percentage of rural branch decreases in 1986 many thinks that the government is planning to expand rural branch in a slower motion.

8.4.3 The activities for which loan can be taken from the nationalized commercial bank

 Nationalized commercial banks provide loan to rural areas for productive and non-productive economic activities. These kinds of loans encourage the short term productive activities most, long term loan also given. A short list of activities for which nationalized commercial banks can give loan:

A list of activities for which loan can be taken from nationalized commercial banks:

1.       Short term loan:


i.        Crop Loan

a.        Amon cultivation

b.       Boro cultivation

c.        Aaush cultivation

d.       Wheat cultivation

e.        Potato cultivation

f.        Sugar cultivation

g.       Jute cultivation

h.       Cotton cultivation

i.         Others cultivation

ii.      Tea

iii.      Processing and marketing of agro products

iv.      Storage building

v.       Social and economic development activities

a.        Rural financing experiment project

b.       Independent project

vi.      For other purpose

2.       Term Loan:

i.         For purchase cow to cultivate land

ii.        Farm of duck-hen and domestic animals

iii.      Fruits garden

iv.      Rasom cultivation

v.       Fish cultivation and fishing

a.        Pond digging and Fish cultivation

b.       Shrimp cultivation

c.        Fishing from sea

vi.      Irrigation instrument

a.        Deep tube-well

b.       tube-well

c.        hand-driven tube-well

vii.    Agricultural  instruments

viii.   Village transport

ix.      Agro-based industry

x.       Socio-economic activities

a.        rural financing supervision project

b.       independent project

xi.      Tea garden development

xii.    Others

Activities for which Nationalized Commercial Banks issue Loans

NCBs issue loans foe both productive and non-productive economic activities in rural areas. Most of these loans are short term nature issued with a view to encourage productive economics activities. Here is a short list of sectors for which NCBs issue loans.

1.       Short term credit.

o   Crop credit- food crop and cash crop.

o   Tea crop.

o   Processing and Marketing of Agricultural products.

o   Building cold storage.

o   Social and economic development activities.

o   Self dependence project.

o   Others.

2.       Term credit.

                        Purchase of cattle for cultivation purposes.

                        Poultry and dairy firming.


                        Silk production.

                        Fishing-Digging of ponds, lobster, fishing in seas.

                        Purchase of irrigation equipments-deep and shallow pump.

                        Agricultural equipments credit.

                        Rural vehicles.

                       Agro based industries.

                        Rural financing observation project.

                        Tea garden development.


Rural credit principles of Nationalized Commercial Bank

The Nationalized Commercial Banks of Bangladesh issues rural credits on the basis of following principles:

                        Credit cannot be issued at a time from more than one financial institutions or bank for the same purpose and same land

                        A declaration must be made from the loanee describing that he did not take any loan from any other financial institutions for the purpose mention above.

                        Loan cannot be issued in favor of any defaulter.

                        The loanee has to install a sign board on the project site mentioning the name of the bank, if he takes the loan for any special project.

                        Loan repayment must be made on the basis of consultation with the loanee.


                        Land or any other permanent assets can be accepted as collateral in case of relatively rich farmers but in case of poor farmers of landless, equipment purchased by the loan amount of crops produced by the same can be used as collateral.


                        The branch manager or field workers trained in evaluating loan appraisal or ensuring the right usage of loan and recovery of loan on time have to personally communicate in the localities of loanee.;

                        It is mandatory to take the comment of Member or Chairman of Union Council of the area in which the loan applicant reside.

                        If the loan is issued than a “Loan pass book” must be given to the loanee which must be produced to the branches in case of every loan transaction.

                        Loan supervision service charges and extra interest rate as a penalty for default can be recovered.

Problems faced by the Nationalized Commercial Banks in rural areas while recovering the loan:

Generally the following problems create obstacles to the normal activities of Nationalized Commercial Banks in rural areas:-

  1. For the bank lack of educated organizational structure the policy and decision making related to the rural credit are meaninglessly delayed.
  2. Supervision and Monitoring of large areas under the rural branches are not only the troublesome but also expensive.
  3. There is no provision for supplying educates vehicles for the loan inspector in the rural credit principles of NCBs.
  4. As the bank officials are used to the banking practices in urban areas, without sufficient training they fail to perform the loan activities in rural areas.
  5. The rural branches are far from the houses or working place by 10/20 miles and the daily transaction period of commercial banks coincides with the working hour of rural people. So they have to waste their valuable times to make transaction with banks.
  6. There is a lack of effective coordination’s among the rural credit institutions for the accomplishments of credit activities. As a result the wicked loanee can manage to take loan from the different institutions for the same purpose at the same time. This is why there is a tendency of avoidable misunderstanding between the officials of different NCBs.
  7. It is customary not to make any transaction in foreign currency in the rural branches. So the rural people tend to transfer their savings to the urban branches avoiding the rural branches for the accomplishment of such transactions. This reduces loan able fund of rural branches.
  8. When the officials of rural branches refuses to accept any loan proposal of any illiterate rural inhabitants applications due to the mistake in fulfilling the loan application form, they tend be doubtful about the honesty of the bank officials.
  9. There is a unnecessary delay as the manager of the rural branches send the loan proposal of higher amount to the Zonal Managers, due to his limitation in sanctioning loan of higher amount and the consequent return of the loan proposal.
  10. It is seen that the corrupted Member and the Chairman of Union Council tend to provide wrong information to the loan officials about the qualified loan applicant. It is also said that this Member and Chairman tend to influence the loan officials for sanctioning loan to their own or their relatives.
  11. Although the loan sanction on just time, but the loan proceed is not used for the desired activities. As a result the loanee fails to repay the loan on time.
  12. There is a lack of enough security in rural branches, as a result the clients and bank officials are always feel insecure in carrying the money.
  13. The loan officials habituated to the urban atmosphere cannot easily adopt themselves to the backward conditions of rural areas. As a result they cannot discharge their responsibilities according to the expectations.
  14. There is always want of educational institutions of up to the mark quality in the rural areas, as a result the bank officials transferred from urban areas keep their wife and children to the urban areas and they suffer from mental agony.
  15. There is also want of good quality hospitals and opportunities for amusement.


Chapter 09

Institutional sources – Grameen Bank

9.1 By borne history of Grameen Bank:

Grameen Bank was founded for the first time as a project in a village named Jobra at Chittagong in August, 1976. Taking steps by Bangladesh Bank, the project has been scattered in 1979. The Bank had been turned as a self reliant bank in 4th September, 1983. The authorized capital of that new bank was 10 crore where as paid –up capital was 3 crore taka. Among the total capital amount, Government portion is 40 percent and remaining 60 percent iks contributed by the landless borrower of loan. To provide loan among the village landless men and women, Grameen Bank is a special financial institution. “Loan is a productive resource and if the villagers get the loan under easy covenants they can be self employed without the help of others”, this was the main theme of the Grameen Bank Porject. 

9.2 What is Grameen Bank?

Grameen Bank is a financial institution to provide loan facilities among the landless men and women living in villages. Though in 1970s branches of Krishi Bank and Nationalized commercial Banks spread out in villages, necessity of a separate bank for the poor village people was raised. Examining for 3(three) years in Chittagong, this project was formerly introduced in Tangail district with the financial help of Bangladesh Bank in November, 1979. At that time unit of the bank was worked in group with villages branches of Krishi Bank or Nationalized Commercial Bank. This project became a self-reliant special financial institution in September, 1983.

9.3 Objectives & Activities of Grameen Bank

1. To build a structure through which according to banking rules landless village people can obtain loan facility without security and with this poor village farmers can be protected from Mohajon.

2. Providing monetary facilities to unemployed and dependent village people so that they can engage in profitable financing activities.

3. Spread out the banking facilities among poor men and women.

4. Creating opportunities to encourage the unemployed and dependent people in self dependent activities.

9.4 sources of fund

Grameen bank collects fund from various sources. They have funds without paid up capital too. Beside this Grameen bank increases fund through collection of deposits. Some times Bangladesh Bank gives the refinancing opportunity with easy terms which is an important source of funds for Grameen bank. International Funds for Agricultural Development( IFAD) a foreign organization provides financial help to Grameen bank.

Authorized capital of Grameen bank is Tk 500 million. Paid up capital was Tk.318 milion in the last 2005. Reserve fund was Tk4396 million and total deposit wasTk31771 million in the last 2005.

9.5 Management of Grameen bank

Management of Grameen bank is consisted of 11 members of directors among them one is chairman who is appointed by the government. This directors committee takes all the decisions. Among the directors of Grameen bank four directors are credit receiver shareholder among them two are women. Managing director of Grameen bank is appointed by government who acts as a chief executive officer.

9.6 organizing techniques of Grameen bank


According to the founder of Grameen bank Dr. Md. Yunus, ‘Grameen bank is a circle within a circle’. The smallest circle is each group of village and the biggest circle is the head office in Dhaka. The following chart shows it clearly



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Group: A group is consisted of equal five male or five female members. A group can not form with close relatives or the mix of male and female. The members elect the chairman and they meet for one time in a week. Bank teaches the members and teaches how to sign. Later among them two are selected for credit and weekly installment is arranged for credit payment. The use of credit and installment payment pattern is satisfied the bank then decides to grant credit to others members. if any one of the first two credit receiver fails to pay credit then none of the members of the whole group will be able to get credit. Village landless association and women landless association is formed separately by the similar men members and similar women members respectively. It can be remind that a member who is landless or owns 50 satangso lands can be a member of the group. Also be mentioned that members of the group can receive credit single or jointly.




Center: A center is consisted of five to ten groups. Head of the center is elected by the chairmen of the groups. Head of the center can expelled any member for disobeying any rules. He tries to make solution after discussing the problems. He can take steps to provide credit from the reserve fund.




Branch office: Under a branch office generally there are fifteen to twenty villages from a union and the centers of these villages are treated as the working area of a branch office. Without head of a center one field manager is there and three to five bank workers or both of them roam the villages and supervise the centers. Field workers are present at the weekly meeting at the center and submit the potential borrower, after discussion they submit for credit. If credit is allowed then credit is distributed among the present members in the weekly meeting. Again in the weekly meeting they urge the members to pay installment and collect installment from credit receiver. Two types of field workers- male fieldworker and female field worker. One male field worker supervises a group consisting of about 250 members. On the other hand a female field worker supervises a group of 150 members. a program officer supervises the activities of two or three centers and advises to the head of the centers if necessary.




Area office: One area office is needed for supervising 12 centers situated in a particular area. Area manager can sanction credit amount at best Tk.5000.00. he can transfer the field worker in his own area and can allow quarterly budget of the centers.




Regional office: The area manger of Grameen bank selects the rules for his area. His main work is to collect and distribute information. He acts as a communicator between head office and the others office. Computer is used in every regional office to transfer information and data valuation. Following are some monthly report published from regional office-


1. Report on reserve loan distribution and loan payment status comparatively.


2. Credit distribution, number of members, statistics of center opening based ob area.


3. Description of the savings of the members.


4. Description on default loan based on area.


5. Report on recovery of loan, etc.


Regional manger calls meeting with area manger and analyses their work.




9.7   training management of Grameen Bank


An important side of Grameen bank is its training management. In this management system, it does not follow the conventional system of trainings only, its trains its members practically and taking discussions with everyone. An employee is sent to the villages to observe the rural activities of rural people and observing the banking activities of  Grameen bank practically. The main word of the training system is the training on the rural activities of rural people is more efficient than the bookish knowledge. The bank informs the activities of Grameen bank and the rural people before sending the staffs in the villages. After field working and observing then activities of branches the staffs return to the Bank training institute. In the training institute the asked to submit decisions alteration and proposals tp make more effective the rules of bank. The staffs participate in the discussion actively. The finally accepted proposals motivate the staffs.




9.8 saving funds of Grameen Bank


There are two types of saving fund in each group- one is Group fund and the another one is Emergency fund.




a. Group fund:  all the members of a group deposit one taka in every week. They deposit the money to the group chairman or the secretary in weekly meeting. Beside this when the credit is allowed to a member then 5% of total credit is deposited in the group fund. An member can take loan from this fund for any selective work or for any problem.  The terms and the conditions are selected by the group members jointly. For any emergency case like treatment, marriage etc. any member can take loan from this fund. Though every member has contribution to this fund none can claim it as a whole.


B Emergency fund: an emergency fund is created without the above fund. If any member fails to pay credit then the others members can pay credit from this fund for the defaulter. It is considered as insurance for accident or other emergency cases like death, inability to pay  credit etc. 25% interest from the paid credit is deposited in this fund by the bank.


9.9 Credit rules of Grameen bank


The main characteristics of credit rules of Grameen bankare given below:




1. Borrower must be a landless man or woman according to the definition of landless and they will must make a team of five members.


2. There is no security needed for taking credit from Grameen bank.


3. For taking credit all members must be equal and their financial and living standard socially is same.


4. The person whose family owns less than 50 satangso land and the value of other assets is less than the value of one acre land he or she will be treated as a eligible person to receive credit from Grameen bank.


5. For borrowing credit from Grameen bank the member of a team will constitute a group fund as an emergency fund that will use for the members of the group actually.




9.10 Credit recovery systems of Grameen bank


Grameen bank follows the following systems to recover its credit:




                        Credit recovery starts after on week of disbursement of credit.


                        Credit installment is paid at two percent of total credit.


                        Credit receiver deposits one taka with every installment in his own account.


                        Borrower is bound to pay his entire installment within fifty weeks.


                        25% interest imposed on total credit is deposited as emergency funds.


                        Accidentally if any borrower fails to pay installment then it is paid from the emergency funds.


                        Every member of credit team is bound to open a bank account at Grameen bank after he or she declared as a member of the team.


                        Every member of a team can receive maximum 5000.00 taka.


                        Grameen bank trains all the members before receiving credit in his time, every member saves 1 taka every day.




                        Acquired Success


It is necessary to analyze all the aspects to comment on the success or failure of a bank.


After observing all activities, it is seen that Grameen bank has expanded itself very rapidly. The very mentionable achievement of Grameen bank is the Nobel Prize for peace to its founder chairman Dr. Md Yunus and its Grameen bank.



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Grameen Bank


Sector wise Percentage of credit (1999 – 2005)



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9.12 Problems of Grameen Bank


Grameen Bank has emerged as a bank about three decades. So it has acquired a lot of successes in various sectors like aggregating assets, savings collection, development of the rural women’s status and many others. But it could acquire more successes if grameen bank could not face some problems. Some problems have been mentioned below:




                        The solvent and powerful persons are not looking in a good concern the financial and social status development of the rural insulted landless and the women and they also discourage them to make close transaction with Grameen Bank


                        The staffs of the other banks in an area do not behave well with the staffs of Grameen bank.


                        Grameen bank has no so much funds to provide the uncountable landless and for the unlimited deprived women in the villages.


                        Grameen bank does not give importance to collect deposits from which it can make loans like others commercial banks.


                        Staffs of the Grameen bank can not cope with the around environment.


                        The illiterate half literate and the ignored people of the villages do not easily believe the speech of the bank staffs. So it is difficult to bring them under the activities of banks.


                        Grameen bank considers the faults of one member as the whole group. So, every member of a group suffers for one mistake.


                        For long term loan system it wastes many working hours of the bank staffs and since loan is provided in a very small amount it carries a lot of service charges for each installment comparatively others banks.


                        Recently Grameen bank is investing credit in out of credit sector at low risky sectors. So, it is apprehended that Grameen bank will stand out from it main purposes.


                        Founder of Grameen bank feels that the success of this bank is for himself and he believes hard and soul to take as challenges for this bank then it will suffer from crisis of leadership.


                        Grameen bank gets credit from domestic or foreign sources like IFAD and others. So, is it not dependability to others?






Chapter 10


Role of Bangladesh Bank




Bangladesh Bank is the controller of local currency. So it has to perform various types of roles to provide rural credit. Rural credit has some expected criteria. In oreder to provide quality and quantity of rural credit in expected motion Bangladesh Bank performs some special duties. Follows are noteworthy-


  1. Determine policy of rural crdit.
  2. Development of institutional infrastructure
  3. Determination of target
  4. Determination of lending norms.
  5. Inter institutional coordination
  6. Determination of Rc interest rate
  7. Arrangement of refinancing
  8. Preparing project
  9. Improve skill
  10. Training
  11. Research
  12. Data collection
  13. Seminar, Symposium




Determining policy for rural credit:




Before liberation the central bank was indifferent to provide rural credit especially in Bangladesh Govt. encouraged Bangladesh bank to provide rural credit and Bangladesh bank played active role to provide rural credit. It measured credit and disbursement among the involved institutions according to institutional power. Infixing overall rural credit it issue comparative rights with other sectors. If take then in rural credit system or not. If take then now much whether foreign aids is acceptable or not, what are the often assistances and now much these are financed by Bangladesh Bank and it offers standerd suggestions for the govt.


Sometimes these rules are changed and extended according to necessity. Recently taken and spread some principles of rural credit are as follows-


a.        Farmers have expectations to produce grains. Banks must finalize credit for them before grain-year starts. For this encouraged farmer who has plan for producing specific grains must submit his name and area in relevant branch of the bank.


b.       Farmers have certain necessities. They take credit yearly at a time. Bank should grant credit for the farmers according to credit norm.


c.        Credit taken farmer can change his plan. Bank given chance farmer to change his plan.


d.       Banks have the list of credit taken. But some pervious credit taken may not issued pass book. Bank must issue pass book for the credit taken according to present principles of credit. There are some criteria for taking credit. A farmer will get credit if he completes the criteria.


e.        The branches will take two photos from the credit taken in order to issue pass-book. Bank will reserve one copy of photo and another will be set with pass book.


f.         Chairman of Union Parisod doesn’t need to identify the credit taken. Branch manager will handle it.


g.       Documents will finalize yearly. It is not necessary to certify documents whenever the credit taken will collect credit partly.


h.       Documents will be finalized and certified annually. It is not necessary to certify it again and again when the credit taken will take credit form bank.


i.         Punishment interest must not be fixed before the day of payment.


j.         Branches of the bank will not extend any new loan to chronic defaulters. The borrowers, who did not repaid the loan within due time or re-determined time or loan taken by the re-determination of prefixed time frame but did not paid by the predetermined time frame or did not paid without showing any satisfactory reason to the bank, are treated as chronic defaulter and are not entitled for any new credit facilities.  


k.       Respective union or thana agricultural credit committee will be equally responsible and attached along with the correspondent branch to recover the distributed credit which was extended by the recommendation of union or thana agricultural credit committee.


l.         In lead banking system branches will sanction and disburse the credit according to the union allocation in any circumstances no branch will operate his loan activities within the area of other branch.


m.     Members of the co operatives under BRDB and BSBL who are entitled to get crop loan from the program of BRDB and BSBL will be excluded from the list of borrower prepared by the bank. It must be ensured that no farmer will get any loan twice for the same purpose. For this reason borrower list of co operatives and corresponding banks must be checked.




Development of institutional infrastructure:


Before independence only cooperative societies and the then Krishi Bank issued rural credit. But after independence Bangladesh Bank observed somewhat weakness and conflict within these institutions. So Bangladesh advised the commercial banks to take part in rural credit system. And then ordered expectations based activities to spend rural credit. In 1977 Bangladesh Bank issued the commercial banks clear order to materialize a 100 crore Taka special project.




            Bangladesh bank has some principles to spread rural branches. These are –


                        Bangladesh Krishi Bank


Krishi Bank gets special priority to open its branches in its selected areas. Even if a commercial bank has plan to open branch in that area then according to the advise of district agricultural credit perished Krishi Bank can open its branches there.


If krishi bank can show increase of savings or logical statements, it gets permission to open branches in urban area.


                        Commercial Bank-


Commercial banks get permission to open branches in selected areas in oreder to materialized special agricultural credit. But the number of branches must be according to necessity.


Govt ownership has been withdrawn over Uttara and Pubali bank. Thse banks are not to allow agricultural credit. But these banks have special branches to issue agricultural credit. District agricultural credit parisad has advised Krishi bank or any other state owned bank to handle those matters.


A commercial bank can open its branches in a town if there is no other branch of it within ten miles. But it has to open minimum four agricultural sub-branches.




If the bank runs traditionally, it can open its branches in every union. This is logical. There are some necessities to take this project—










In rural areas monetization is urgent for economic-development. For this opening branch is essential. More essential is to make the employee qualified.




Determine annual target:


Bangladesh Bank finalizes rural credit annually. It takes advice from finance ministry and agriculture ministry, in this respect currency supply. Overall credit norms and advantages in natural disaster get special priority. Statistics of production cost of various types of gains is collected from agri- ministry, agri-development cooperation on from ther organization then annual target is determined nationally. Bangladesh Bank and Rajshahi Development Bank jointly provide 60% of rural credit. Bangladesh Krishi Bank provides little bit less than 50% of total fixed rural credit. Co-operative bank and B.R.D.B has determined 161 crore taka as annual credit. Participating commercial bank’s target is somewhat short from 300 crore taka. Now this is noteworthy that 3.2 percent is fixed for agro-based industry ours is an agriculture country. We have acute short of cultivating land. So, this allotment is sheer short. It is also notable that 709 crore taka and 341 crore taka among total credit and mid term basis respectively. There is not long term basis allotment. Moreover, mid-term basis credit is one-third of total allotment. For this reason, opinion of expert is saying that investing is not encouraged.   




Determine credit norm:


There is no additional credit for specific grain or selected farmer. Bangladesh Bank (BB) wants to avoid this situation. So it has determined the principle of credit norm. Generally this is for grain credit perspective. From previous illustration this is 61% cost of producing specific grain is considered in determining credit norms. Credit taker gets credit for per acre of land maximum & minimum measuring this two levels are according to credit norms. Allotment of total credit is divided into two parts-


                        Purchasing fertilizer


                        Capital (for production cost)




Inter-institutional co-ordination:


Approximately 10 institutions are involved in distribution credit in rural areas. There is chance of misunderstanding each other for lack of meaningful coordination. Moreover if there are two institutions in same area, credit takers conceal correct information & collect credit from another institution without repaying his credit of the certain institution. This phenomenon is completely unexpected. For controlling this Bangladesh Bank has made a committee including high-ups of various institutions. They are expects in this field.


Structure of national committee-


                        Governor of Bangladesh Bank- President


                        Deputy Governor of BB- Vice president


                        Economic advisor to BB- Member


                        Executive directors of BB of agro-credit dept. – Member.


                        MD of BKB- Member


                        MD of any CB- Member


                        President co-operative bank- Member


                        GM of RDB- Member


                        Chief employee of agro-credit of BB- Member


                        Representative Finance Ministry- Member


                        Representative LGRD Ministry- Member


                        Representative agriculture Ministry- Member


                        Representative planning commission of Govt.- Member


                        Four representatives from non-govt. co-operative union- Member


                        Representative Bangladesh agriculture university- Member


However, coordination between the rural credit distribution institutions is not effective & fruitful. It is expected that BB will innovate new formula & systems to develop co- ordinations among the rural credit distributing institutions.




Determine rate of interest in rural credit:


Various institutions distribute rural credit & direct economic activities. BB fixes the rate of interest of those institutions. Co-operative banks can provide credit in a lower rate than other institutions because their expenditure is somewhat lower. BB orders to distribute credit by 12% or 13% interest. It also permits the institutions to collect service charge. The rate of service charge is 4%. Fixed rate of interest on rural credit-


A. Agriculture:


                        Short term basis- 12% interest + 4% service charge


                        Mid term basis- 13% interest + 3% service charge


B. Cottage industry- 13% interest




Arranging Refinance:


BB observes credit collection & the slandered of credit distribution. Then it offers refinance for the banks. For taking this refinance a bank has to submit-


                        Total credit


                        Total distributed credit


                        Collected credit


                        Pending credit


Refinance matrix is changeable. But it will be effective on changing interest on refinance. Present maximum bank interest rate on refinance is 10.75%. BB offers refinance for the banks considering economic priority & sustainable credit distribution.


Refinance Fund:


According to BB act 1972, BB can create two funds from its profit. Savings of these two funds can be expanded for rural credit distributing institutions. They can get direct credit from those funds. Rural credit fund primarily made up with 5 million taka. On the other hand stabilizing agriculture credit fund is made of with 2.5 million taka. This money is collected from government. 




Preparing project:


For mid-term and long term basis credit disbursement economically profitable project making is earnestly essential. But the rural credit distributing institution has lack of enough experts. So they want of it. To avoid this problem as the central bank Bangladesh Bank has made a new project in 1979 namely “project division”. Main objective and duties of project division areas follows:




Credible economic project making is the main duty of project division. Moreover helping popular projects like Grameen Bank is also a responsibility of project division. Establishing tube-well and managing of those is another duty of project division. Bangladesh Bank has selected more6 project for providing credit. These projects are:


  1. Gain based – e.g. banana cultivation.
  2. Special function e.g. derange system
  3. Woman project


Most of the projects are developed as directed by the foreign authorities.




Model project




Lakha cultivation project


Concise introduction of this project


a)       Area


b)      Quality


c)       Credit norm


d)      Payment


e)       Security money


f)        Rate of interest.


Self-sufficient project






                        Beneficiary group


Rural finance experimental project


This project has been running since 1977 with the help of the U.S.A. Government. Main objective of this project is to develop the current condition of poor rural people. USA is directly helping it.


In this project interest rate is different for various activities and many categories. Minimum rate is 12% and maximum rate is 36 %. If some one’s cultivable land is below 2 acres and annual income is 5000 the can be benefited from this project.




Increasing effectiveness of rural branches


Bangladesh Bank has taken these 5 steps to increase effectiveness in the managerial stage of rural credit distribution groups such as:


1)       Lead bank system


2)       Counseling committee


3)       Pass book


4)       Observing unit


5)       Recent information collection.






Rural banking is a new dimension in banking industry all over the world. But even recently it is easily realizable that most of the bank employees are experienced in urban banking system. So training is must for them who are working in rural business and rural bank owners. Tense to be a severe problem for Bangladesh govt.


In 1972 total numbers of bank employee was 14000. But it is now more than 6timesofthe number. Most of the employees are now working in rural areas. To train them properly is an essential task for the banks.


Bangladesh institute of bank management was established in 1974 due to the importance of training. Moreover Bangladesh Banks encourage the banks to establish there own training institute for there employee.


Bangladesh Bank Management Institute not only train the rural bank employee but also train:


i)                     General banking studies


ii)                   Urban credit system


iii)                  General management


iv)                 Administrative management


v)                   Legal system of bank business


vi)                 Bank observation etc.


Bangladesh Bank has permitted Grameen Bank with dignity to spread out its activities in rural areas. Achievement of Bangladesh bank in rural credit is more than other banks and institutionswhich are involved in rural credit. So this is praiseworthy. Grameen bank trains its employees properly to achieve this success. Bangladesh Bank always supports it. 




Research in rural credit


Bangladesh Bank advised to finance ministry as well as govt. to take decision about rural credit, suggestion about rules and principles must be realistic to be effective.


Among other matters Bangladesh Bank give special priority in rural credit system. It is noticeable that Bangladesh Bank has realistic analysis. Bangladesh Bank has also a statistic department.




Data Collection


Without correct information it is quite difficult to evaluate


                        Past activities


                        Present situation


                        Future plan


Without information no activating is realistic and effective as well as fruitful. So Bangladesh Bank collects data about rural credit for better dimension, statistic department of Bangladesh Bank collects data of other banks and institutions involved in rural credit. It is also analysis data and information.


Moreover Agri-credit department, Agri-credit observation department and rural credit project division also collect data and information for specific necessity round the year.




Six types of data are collected:


  1. L-1- Monthly document of credit distribution
  2. L-2- Document of pending credit
  3. L-3- Monthly document of collected agri- credit
  4. L-4- Analysis of pending credit
  5. L-5- Loan analysis
  6. L-6- system of recollecting credit


a)       Not always practicable


b)      Experts sometimes find that some collected information is worthless


So it is quite difficult to materialize a project.






Bangladesh Bank arranges workshop/seminar and symposium for high-ups of included rural credit groups. Objectives of these programs are to identify problems and probabilities of rural credit. After liberation Bangladesh Bank has no prior experience in handling vast rural credit. So it faces a hesitation and problem to run this project in 1975. Bangladesh Bank arranged a splendid seminar on ‘financing in agriculture essays, lectures and suggestions of feat. Seminar are collected in’ souvenir of the seminar on agricultural financing. Bangladesh Bank published it.


In 1978 Bangladesh Bank U.S aid, U.S.D and ohio state jointly arranged an international seminar in Dhaka. After the seminar Bangladesh Bank published problems and issues of Agricultural credit and Rural Finance contain local and foreign essays, lectures and suggestion of the experts who participated in that seminar.


Recently a gorgeous seminar has arranged by Bangladesh Bank U.S Aid and ohio state university jointly.




Bangladesh Bank has played a vital role in the managing rural credit. But all the projects of Bangladesh Bank are not totally flawless. However it can be expected that in the near future Bangladesh Bank has played a vital role in the managing rural credit with its motion and experience undoubtedly.








Recovery of rural credit


Annual Agricultural Credit Programme




Annual programmed based financing for agriculture and rural economic activities is indispensable, because this sector is still less preferred area for the banks and the financial institutions. To ensure adequate credit flows to the agricultural sector, which is producing almost a quarter of GDP and absorbing more than three-fifth of labor force, the indicative disbursement targets for the NCBs and specialized banks are designed with occasional refinance support from the Bangladesh Bank. Disbursement targets are set by the lending banks themselves on the basis of previous years’ actual disbursements, expected credit demand in the agricultural sector and the availability of fund.


For strengthening income generating activities and gearing up self employment initiatives thereby eradicating poverty in rural areas, the Grameen Bank and large NGOs played a significant role through their micro credit operations. Their disbursement and recovery position in FY04 were more than double from that of institutional lenders of agricultural loan. From the efficiency view point, micro credit has been more successful, particularly, in respect of recovery, disbursement and reducing overdue though the both types of loans are directed for the rural people.




Against the disbursement target of Taka 43.8 billion, actual disbursement of agriculture and rural credit was Tk 40.4 billion during FY04 (Table 7.1). This was 23.2 percent higher than the previous year’s disbursement of Taka 32.8 billion, but the target attainment of this disbursement was 92.2 percent as against 92.1 percent in the previous year. This was due mainly to disbursements fell short of target programmes in crop loan, irrigation equipment, and livestock and fisheries sectors. Disbursements, however, increased in FY04 in crop loan, livestock, fisheries and poverty alleviation sectors than previous year’s actual disbursements. Credit disbursement for the poverty alleviation in FY04 exceeded the programme target and previous year’s disbursement by 17.2 percent and 32.5 percent respectively.






Recovery performance of agricultural loan which was improving since FY01 suddenly declined in FY04. Recovery as percentage of overdue loans declined to 50.2 percent in FY04 from 53.9 percent in FY03. The recovery rate was impressive at 86.3 percent for RAKUB followed by 65.7 percent for BKB in FY04. This was 33.9 percent for the NCBs during the year under report. In this situation, the recovery measures introduced in the earlier years also continued in FY04, which, inter alia, included persuasion through various types of fairs, negotiations, demand notice, intensive supervision etc. With a view to strengthening the recovery position, BKB continued its MIRACLE (Maximum Incentive for Recovery of Classified Loan Entirely) policy as a strategy to improve recovery. RAKUB, on the other hand, continued its PARL (Participation of All for Recovery of Loan) and BUP (Bottom up Planning) policies during FY04.


As in the previous years foreign banks and local private commercial banks played very insignificant role in disbursement of agricultural credit. The private commercial banks disbursed only Taka 1.8 billion agricultural credit which was in addition to Taka 37.9 billion agricultural credit disbursed in FY04. Shortage of required manpower and also higher cost for undertaking monitoring and supervision are prime reasons for non involvement of private commercial banks in the sector.


There are ample opportunities for commercial banks’ involvement in agro based venture. The banks need to include this in their business strategies and actively look for such business. The banking system as a whole has been suffering from the problem of excess liquidity and they can go in a big way to revamp the rural economy. But, the possibility of stucking-up loan cannot be ruled out in rural areas, if credits are dispensed to multifarious borrowers without close monitoring and intensive supervision. Adequate and timely disbursement of credit is a pre requisite for making agricultural production level sustainable. The banks’ loans in agriculture can be streamlined through development of linkages among institutional lenders and NGOs which will also help in identifying worthy borrowers. The irregularities of existing loans should be eliminated and regional concentration of loans should be avoided through balanced distribution of credit.



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Financing of Small and Medium Scale Enterprises


 Bangladesh Bank continued providing refinance facilities to the banks during FY04 for small and medium scale industrial lending under some special schemes and programmes. A brief review of such on-going scheme and programmes is given below:




a) Refinance to BASIC for lending in the small and cottage industries sector


For financing small and cottage industries in the private sector, the Bangladesh Bank has been providing refinance facility to Bank of Small Industries and Commerce since FY99. A sum of Taka 250 million was sanctioned and disbursed to BASIC in FY04.


b) ‘Self-employment Small Enterprise Credit Scheme’ for voluntarily retired officers /employees


Self-employment Small Enterprise Credit Scheme for voluntarily retired officers and employees introduced in 1993 with a fund of Taka 0.2 billion provided by the Government was also in operation during FY04. Under this scheme refinance facility for Taka 0.04 billion was provided to three banks up to June 30, 2004.




c) Refinance scheme for agro-processing industries


Bangladesh Bank launched a scheme in FY01 to provide refinance facility to the scheduled banks out of its Industrial Credit Fund for financing of agro-processing industries in the areas outside of Divisional Head Quarters and Narayanganj town. Under this scheme 100 percent refinance will be available to the banks, for medium and long-term loans to an industrial enterprise with fixed assets not exceeding Taka 50.0 million. A total of Tk 250.0 million has so far been disbursed under this scheme till end June 04.




d) Refinance for small enterprises


The Bangladesh Bank has introduced a refinance scheme of Taka 1.0 billion out of its own fund for the development of small enterprises in the country effective from May 04. Refinance facilities under the scheme will be provided to banks and financial institutions at bank rate. Entrepreneurs having fixed assets not exceeding Taka 10.0 million will be eligible to get loans under the scheme. In addition to the Bangladesh Bank own fund the World Bank has also agreed to provide a fund of US$10.0 million to the Bangladesh Bank under a Development Credit Agreement, signed with the Government of Bangladesh for financing the development of small enterprise sector. The World Bank fund will be pooled with the Bangladesh Bank’s own fund and be used for refinancing banks and financial institutions against their lending to the small enterprise sector. Refinance under the scheme, however, did not commence in FY04.




Mainstreaming of SME and Micro Finance


Potentialities of the SMEs for rural economic up liftment cannot be exaggerated. Despite its positive contribution to output growth, income and employment generation, the SMEs are yet to draw attention of the commercial banks. The SMEs contribution to GDP remained within the range of 4.4 percent to 4.7 percent during last five years. Commercial banks involvement to export oriented and agro based industries is likely grow further in coming years considering viability of these industries. The government, through its various agencies, is relentlessly endeavoring for development of the SMEs in the country.


The Grameen Bank and the large NGOs not only play an important role for poverty alleviation, but also help protect against further deterioration in poverty situation through their Micro credit programme. These MFIs (Micro Finance Institutions) are not regulated and supervised by any single institution. To bring the MFIs under a regulatory framework and to ensure transparency and accountability of their operation, the government of Bangladesh decided to establish a separate Unit named “Microfinance Research and Reference Unit (MRRU)” on June 18, 2000 at the Bangladesh Bank for three years term. To administer the functions of this Unit a Steering Committee under the Chairmanship of the Governor of Bangladesh Bank was formed with the following terms of Reference-


                        Formulation of policy guidelines to regulate the microfinance institutions and setting performance standard to ensure their qualitative improvement.


                        Preparation of uniform accounting guidelines for microfinance institutions to ensure their transparency and accountability.


                        Monitoring the activities of the MFIs in compliance of the policy guidelines prepared by the Committee.


                        Recommendations for preparing a legal framework in support of the Microfinance Research and Reference Unit or a new regulatory body in its place to act as the regulatory authority for the microfinance institutions.


The Committee has completed first three work of the TOR and prepared operational guidelines for the MFIs, which would be implemented very soon. Following a request by the Steering Committee to extend its time to finish the remaining work, the government extended it till June18, 2005. Recently a secretariat of the Unit has been established in the Bangladesh Bank to implement Committee’s recommendations. The Unit has started working formally to collect information on the MFIs. The Committee is currently working to prepare a legal framework of a regulatory authority for this sector.




Agriculture Credit Projects/Programmes under Bangladesh Bank Supervision


The Bangladesh Bank has for some years been supervising implementation of some own financed and donor financed agricultural projects/programmes. During FY04 a total amount of Taka 0.8 billion was disbursed and Taka 0.4 billion recovered under a few such ongoing projects/programmes viz, the Agro Based Industries and Technology Development Project (ATDP) , Marginal and Small Firm System Crop Intensification Project (MSFSCIP), Crop Storage Godown Project, Shrimp Culture Financing Scheme etc. Apart from these, credit disbursement under a new project named Northwest Crop Diversification Project started in FY04. The project launched in December 2001 is scheduled to be completed by June 2008. The project is funded by ADB (Taka 2.5 billion) having a credit component of Taka 1.2 billion for financing production and marketing of high value crops in sixteen northwestern districts. The credit fund is being provided to RAKUB for distribution among the farmers and agro based enterprises through four NGOs on reimbursement basis. A total amount of Taka 88.3 million was disbursed to RAKUB in FY04 under the project. In FY04 recovery of Taka 0.4 billion was also made from a number of closed projects (Socio-Economic Development Project in flood and cyclone affected areas, Second Aquaculture Development Project, Shrimp Culture Financing Scheme, North-west Rural Development Project) with Taka 1.5 billion outstanding as of end June, 2004 for future recovery.




Micro Credit Operations in FY04


The large NGOs and the Grameen Banks’ micro credit programme has been a success story in Bangladesh for their poverty alleviation with income and employment generating activities. On the idea of “access to credit is one of the fundamental rights”, the micro credit was designed for generating self-employment initiatives of the poor in rural areas, with emphasis on woman empowerment. Micro credit operation has achieved efficient recycling lending resources with increased disbursements, high recovery and low overdue through its borrowers group pressure technique for recovery of loan in lieu of collateral. There are more than fifteen hundred NGOs dealing with micro credit; of which around six hundreds have registered with the N.G.O Bureau. The three largest of these with countrywide network (BRAC, ASA and Proshika) and the Grameen Bank account for the bulk of total micro credit lending (Table 7.4).



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Micro credit operations grew substantially in FY04 like in FY03 with 22.4 percent growth in disbursement and 19.5 percent increase in recovery. The overdue as percentage of outstanding loans declined from 5.2 percent in FY03 to 4.8 percent in FY04. Recycling of lending resources of the micro credit providers in FY04 like FY03 was more than 1.5 times of their outstanding loans as of end June 04. On the other hand, agricultural credit disbursements, in line with the previous trend, remained constrained at around 31.8 percent of their outstanding loan in FY04 as against 27.5 percent in FY03, because a large proportion (around 50.8 in FY04 as against 54.8 percent in FY03) of their lent resources of agricultural credit were stuck-up. The micro credit providers own resources and PKSF (Palli Karma Shahayak Foundation) respectively account for nearly half and about one quarter of their resources, rest of their funds come from loan from banks, large NGOs and external donors. The PKSF loan to micro credit NGOs stood at Taka 4.2 billion as of end June 2004, against Taka 2.8 billion as of end June 2003.


Micro credit operations of the NGOs have positive impact in reducing poverty but still are faced with problems. Some of these are : i) absence of/little accountability of their operations, ii) no linkage among the providers of micro credit, iii) absence of regulatory framework, iv) relatively higher interest rate for micro credit etc. All these problems need to be addressed at the proper level.




Chapter 11


Rural Credit Supervision System






Rural credit topic is a new addition in the developing economy. And supervising this rural credit is relatively a new concept. It would not be said much that, supervision concept is ________ from practical management of industry. To manage industry supervision is a must. It has been seen that the more intensive, skill and meaningful the supervision system of labor in an industry the more the production, the more improved the quality of the production, the less the wastage of working hour, the more the skill of the labor etc. According to a famous writer “Industrial Supervision is the technique of engaging a labor or a group of labor to skillfully doing a work in     “. On the other hand, another famous writer has explained about industrial supervision:




(a)  To accept plan in doing work and be active to the same according to the principles of the institution;


(b) To distribute the responsibility of work related to labor and other staffs of particular work or to transfer the responsibility to appropriate labor/ staff according to needs;


(c) To assure the completion of particular work according to the principles of the institution.




The above definition of supervision given by the two laureates is clearer and broadens by another famous writer Jorge Harshley. According to Harshley Supervision means:


(a)     To order and control the subordinate staff as well as to provide necessary help and advice.


(b)    To select the right labor/staff for every work or part of every work.


(c)     Encourage selected labor/staff to perform his particular duty and to train him properly on how to finish that work with the highest efficiency.


(d)     After training the skill ness of the labor be measured so that whether the training provided was effective or not. 


(e)     After evaluation the staffs that needs correction, they are provided with correct information or extra training.


(f)      To involve the more skilled staff for a particular work or to transfer him into the right place. On the other hand, the staffs who are unable to contribute in the present workplace or transferred in elsewhere and cannot contribute there also he or they should be fired or threaded to be dismissed.


(g)      To identify the staff who has done the work (quantity of work, speed and quality) as expected and be rewarded.


(h)     And last of all, to replace every labor of the workforce into a united workforce.




From the above discussion it is proven that, successful industrial supervision is not meant only for the purpose of increasing production but also for the quality of the product, reduce the production cost; increase the skill of the labor, cordial teamwork and moreover to sustain the institution’s main objective and principles.




11.2 The viewpoint of Rural Credit Supervision in the primary level:




The idea of supervision of rural credit is very recent. So, there is no such accepted theory about this topic. The persons related to rural credit development take different views in this topic. Some of the views are described below:


a)       Planners’ viewpoint: to develop agriculture improved technology is needed and for this reason enough investment is needed in machine and for current capital. In rural areas involving in economical activities other than agriculture and applying new developed technology production can be increased by which income will increase and thus it is possible to develop economic condition of the rural people. According to planners, credit is obviously a necessary tool but this is not the pre-condition of all development. It is important to supervise whether rural people are taking right loan at the right time and by applying right technology, they are participating in the economic activity proactively. Many opinions say, important conditions of development are to produce in a right way to sale the product good at a competitive price and to finance profitable product. But the third worlds less educated and uneducated rural people do not want to modernize the production method early. Many development economists think that, different kinds of government subsidy other than rural credit— for example interest rebate, to supply fertilizer at a controlled price, expanding services at free etc. contribute a lot to the activity of rural economy. All these help to establish a perfect basis of rural area. But these steps are not enough to make effective the credit program. In other words, different economic activities other than rural credit contribute a lot to make the economy strong.


b)      Market viewpoint: Farmers take loan for various needs and by using changeable technology and invented items. It is unnecessary to supervise the loan taker if the given interest rate, fund cost and administrative expense is within acceptance limit and if the loan is sure to be repaid. But this idea is not effective in the third world countries as most of the loan takers are uneducated and less educated and unaware of developed technology. On the other hand, farmers are now relatively solvent and active in village politics—- do not want that farmers develop their economic condition by using improved technology. As a result, maximum usages of credit by general farmers are not certainly free from risk. So this is not only market system will certain the better use of loan. On another hand, market is a autonomous system. In this system, no step is taken for direct or indirect forgery and dishonest means related to loan. In spite of that, as needed to make certain the loan repayment the need for supervision even from the viewpoint of market cannot be derived.


c)       Viewpoint of the NGOs:  The viewpoints of these institutions are quite same as the viewpoint of planners. But they have separate viewpoints about two matters, such as:


1.       According to them, it is necessary to convert a strong party by organizing the entire weak credit taker as the relatively powerful people create hinder on the way of improvement of the poor. 


2.       In rural development, government officials are more concentrated to utilize their effort and time for the welfare of their own institutions and the service holders of those institutions rather than the relatively poor villagers.


NGOs believe in developing economy by increasing the village people’s production and income. Worshipping in this belief and by supervising it confirms the appropriate technology, production system, processing and marketing.


3.       Viewpoint of the foreign credit giving institutions:  In the credit taking country the foreign credit giving institutions separately supervise the credit giving bank and its development activity. According to them, it is better t not to involve in the complexity of loan providing bank supervision. Specialized skill institutions should be established to supervise the loan activity rightly. The loan given institutions should continue their loan activity on the advice of such institutions. But banks discourage to continue their activity on the advice of such institutions which in their final stage do not take the responsibility of bad debt loan.


4.       Viewpoint of the financial sector: all the above four supervisions are not fully appropriate in the context of Bangladesh. The four systems overlook the supervision activity of financial sector. Like a post office, loan giving institutions will only supply loan but will not supervise the maximum utilization and repayment of the same — it is proven to be an unrealistic viewpoint. So to accept the necessity of supervision in financial sector the following viewpoint can be seen:


i.                    the loan given branch should take the responsibility of loan. In this matter identify the qualified loan taker, to assure the proper utilization of loan and to assure the repayment of loan is the responsibility of the branch of credit giving institutions. Other development institutions may help to build the project but they should not participate in any way in the above mentioned loan activity. Because as they do not take the final responsibility of the loan, the real purpose of the loan is hindered. The loan distributing branch of the bank must worship about the development of a system relationship with the debtor. Because demand for a new loan has to be created after properly supervising the best use of a given loan is confirmed.


ii.                  Adequate trained and skilled staffs are needed for constructing effective supervision of a loan. For this though administrative expense will increase for the time being. But finally it will be proved to be profitable for the branch bank by confirming loan repayment with profit timely.


iii.                Proper technical knowledge and right training should be provided to develop human relation to the staff related to the supervision activity.




All the above mentioned viewpoints do not deny the importance of the supervision of rural credit. But each of their viewpoints has its own plot and logic. Only open market system and its viewpoint do not have that much direct importance about supervision. Market system is obviously an autonomous system which depends mostly on the rural people consciousness, educational quality, and transfer capabilities of information, proper inputs and distribution system etc. on the other hand, except financial sector, all the above mentioned viewpoint do not completely deny the importance of rural credit supervision, but it does not seem that they have given so much importance to it. According to them, other assistant factors rather than loan will have to be utilized importantly then voluntary use of rural credit will be minimized. Only financial sector for its own use, i.e, to develop the economic condition of the debtor, consider rural credit supervision as a special tool.




What is meant by rural credit supervision?




From the previous discussion, it is seen that, the aim of industrial supervision is the employed labor force. But the aim of the supervision of rural credit system is the credit taker rather the staffs of the credit giving institutions. Rural area is less developed compared to any other area in the country. The third world’s rural area and its people are comparatively backward in education, training, skill, communication capacity, knowledge about up-to-date information, mentality to use technology, innovative capacity etc. according to the economist of developed country, it is necessary to confirm the supply of rural credit to meet the need of more invest able asset. It has been proved that by employing the rural credit system in many third worlds’ villages that the rural credit is not enough by supplying credit to expected sector, expected speed and expected quantity. If supplied credit is not used in the expected sector then different negative effect is seen in the rural economy. For example: inflation, demands for increasing consumption, creditors misuse the loan by their showing off tendency etc. On the other hand, credit providing institutions face huge loss when they fail to collect the loan because of misuse of the loan. This condition undoubtedly hinders the main purpose of supplying rural credit. To get rid of such type of condition economist, expert of rural credit and the staffs employed in the credit giving institutions combined and  discuss, justify, observe and then invest in the system of rural credit supervision. The main purpose of the rural credit is to confirm its best use and repayment of loan.


Not only supply of loan but also supply of the necessary advice and assistance is known as rural credit supervision. Renowned rural economist Dr. Dario Brosard thinks loan supply is a necessary tool of production. But in the overall loan service system he truly thinks loan supervision is beneficiary for the rural area. The overall improvement of the debtor family is the main purpose of rural credit supervision service. On the other hand, Dr. Paul V. Moris advices not to consider only credit giving institutions as the supervisor of the loan rather specify a group of debtor to effectively supervise the rural credit.




Whether rural credit has been used for expected purpose or not and using rural credit whether debtors has been developing their economic condition or not, that is necessary to properly supervised. And the activities of whose successful completion make the supervision effective, the combination of all those activities are known as rural credit supervision. Generally the activities of whose combinations are known as rural credit supervision, some of them are mentioned below:




a.        Identifying the right debtor and distribute the right quantity of loan at right time.


b.       Keep a careful eyes on not to distribute the loan to unqualified applicant.


c.        To supervise whether the loan is used for the reason mentioned in the application or not


d.       To supply information related to production


e.        To help to explain the various problems related to production


f.        To help the debtor to plan for the proper activity


g.       To advice and train for using the improved production system and technology


h.       To keep record of production ,expenditure, loan and income and if necessary help to explain


i.         To implement plan and evaluate it


j.         To confirm the repayment of loan within due time


k.       To take appropriate step to collect the default loan


l.         To keep conscious eyen on not to distribute loan to unanimous, in the name of dead man or the person who does not live in that area.


m.     To keep careful eyen on the branch staff  whether they are distribute the loan by bribing


n.       In the same way, keep a careful eye on the staff out the branch bank whether they are providing loan by bribing or any other way.


o.       For the same purpose, keep careful eye so that they cannot collect loan in other institutions in dishonest way.




To achieve the best result, loan distribution, uses and collection must be systematic. So activities by which loan is distributed among the right clients, to confirm the best use of loan and lastly to improve the condition of the loan taker and make the debtor able to pay the loan within due time is known as loan supervision.




Purpose and importance of rural credit supervision:


There is no logic to think that supply of rural credit as grant or government gift in any economic measurement. This is to mention here that, non-institutional and Mohajani rural credit mainly given to the direct/indirect profit maximizationfor thee credit giver. There is no reason to think that the government and nongovernment organizationare distributing the loan for the same reason. The main of their distributing loan is to develop the economic condition of rural people as well as rural area by using the given loan.




To achieve the above entiond main purposes of supplying loan , the following loan supervision is necessary:


                        to create necessary favorable environment for the use of loan


                        to develop the economic condition of the rural people especially the credit taker by utilizing the supplied loan.


                        To confirm the repayment of given loan and repaid loan is reused as rural credit




To make effective the above mentioned supervision the institutions related to rural credit have to achieve other more purposes. To achieve those purposes for the convenience of discussion they are divided in three groups. They are




(A) Step by step achievable purposes


(B) Achievable purposes before loan distribution


(C )Achievable purposes after loan distribution




(A ) Step by step achievable purposes:


already before it has been mentioned that to create favorable environment for rural credit supervision as one of the main purposes. That is, rural credit supervisors present hair activities, movement and overall behavior of the rural people in such a way that present or future credit taker can find them as helpful friend. In this matter the rural credit supervisors have to do the following things:


1.       to get perfect idea about a particular rural areas economy and to deeply watch the economic changing activity


2.       important financial information about a particular branch bank working area, classification of the society, input and produced agriculture products , current market price etc. related necessary information are collected and supply to the  bank staff who will evaluate the loan of an applicant


3.       to help to develop the economic condition of the overall area under the branch bank rather than a particular community or a population under a certain area rather than a personal development. By following a particular system rural people has to be encouraged to use the loanable economic activity


4.       to take combine effort in areabasis and for the development of everyone, the branch staff as well as credit taking rural people has to be encouraged to plan for the productive and income increasing activity.


5.       To encourage rural people as well as debtor to maximize the savings as well as investment at the time of economic transaction.


6.       Areas current production and irrigation technique related knowledge is acquired and debtors are encouraged to use that knowledge to improve the technology.


7.       To supply the necessary information based knowledge to people about the demerit of the non institutional loan supplier working in that are.


8.       Generally people unofficially informed all the improved production system, seed, developed irrigation system and its advantage, marketing system, appropriate time and medium.


9.       To keep eyes on the effective inputs with the particular branch bank’s working area, machine supply, government and private institutions and for the sake of present and future loan taker, good behavior has to be maintained with its staff, to keep in touch and in competitive price and easy condition and to make proper use of loan and for this reason to supply necessary input, service and machine.


10.    Under a bank area Landlord and zaminder are encouraged to lease or sharecropping the excess land which cannot be used for his profit by providing extra economic facility.


11.    By combining the debtors of the area with their combining effort establish co-operative or any other organization and by helping to increase bargain power to collect input at competitive price (for example- improved seed, fertilizer irrigation system, collect price for saleable product etc)




B) Achievable purposes before loan distribution:


 In a production season many apply for the loan from loan supplying institutions. From them qualified applicant is selected and by supplying the loan on a particular basis – is the aim of this supervising step. To make effective the rural credit supervision the following activities should be done:




  1. The applicants of loan on area basis make conference and discuss and get effective idea about the purpose of loan shown in the application.
  2. Where it is possible build small teams and those teams will be encouraged   jointly to collect loan and use therefore.
  3. To collect perfect information about the applicant’s project land, place or accommodation before taking any final decision about the loan applicant.
  4. To collect information about the applicant’s economic condition as well as area’s political and social status and transaction type.
  5. To justify whether the loan application has the necessary ability and capacity to properly use the expected loan.
  6. To collect information applicant’s permanent residence, land or business institution under the banking area and also to justify information
  7. Justify whether the loan applied by unanimous, in the name of dead man, mad ————————————————————-
  8. To keep eyes on whether branch bank’s staff has sanctioned the loan by the influence of personal profit or relative.
  9. To keep eyen on whether loan is rejected by showing the application as economically ineffective or using it for dishonest purposes.
  10.  Identify real and capable loan application and profitable loan project.
  11.  To measure the loan applicant’s as well as project’s production and income capacity neutrally.
  12. Loan applicant’s saving capacity; saleable seasonal and permanent asset has to be considered to identify the perfect measure of the loan.
  13. —– loan distributed in how many installments, when and by which mode ( cash/fertilizer/seed/machine etc.)———— it should be perfectly decided by discussion with the applicant and also by deeply observing the condition.
  14. Distributed loan in how many installments and how much in each installments, when the installments is repayable; where and by whom the installments will be repaid—– it should be decided before distributing the loan and by deeply observing the condition.




( C ) Achievable purposes after loan distribution :


 In non institutional as well as mohajoni system even the sub-continent’s institutional loan supplier by investing in loan only interested to return the profit and principal and nothing else. But in a poor country developing government as well as private loan supplying institutions is not expected to keep such mentality. So it is normal that after the distribution of loan by properly supervising effective uses can be confirmed. To achieve this purpose of credit supervision, some of the activities have to be followed which are mentioned below:




                        to inform the debtor  about the possible debtor about the possible date of loan distribution to receive the loan installment timely


                        To help to improve the economic condition by proper utilization of loan.


                        To encourage the debtor to abide the acceptable financial discipline of loan taking and repayment of loan installment.


                        to keep eyes on minimize the misuse or alternative use of loan amount for  other work rather than above mentioned work.


                        Capacity of debtor, financial quality and availability of market has to be observed and to advice to use appropriate technique improved production system and improved seed, fertilizer and irrigation system has to be followed and hence increase the rate of production as well as income.


                        to help the loan applicant to make the right use of loan ; it is necessary to help to get the seed, fertilizer, machine, electricity, supply and other service providing institution of government and private personnel have to be communicated.


                        Loan applicant is encouraged to make team or on co-operative basis to collect comparatively expensive and rare agricultural machine and technique ensure the best use of those tools.


                        To practically investigate whether the amount of loan is really is used in the project or land; how, in what quantity and what type of inputs, machine and technique are used.


                        At the time of the production activity or practically implement the project whether any direct or indirect problems are faced or not —– it needs to be time to time supervised by practically investigating the agriculture firm. And to solve the arising problem practical and instant advice is given.


                        Closely observe whether produced goods or crops are taken at the home or they are horded.


                        if it is possible  assume the production or income from an agricultural firm or project where the loan is used at the right time and in the right way and discuss with the debtor about paying the installment; then if it is necessary then change the installment pattern with the current debtor.


                        to collect information about the marketing of product/services from the agricultural firm or project where loan  has been used at the right time and rightly; and thus help the debtor to learn directly or indirectly to appropriately marketing and also to collect  saleable money.






Monitoring on rural credit:


Rural credit institution sanction loan for serious economic activities. Different methods of monitoring process is used for different types of rural  credit. These are discussed briefly in below:


  • Supervision of crops: Difficult essential parts of crops loan supervision are select the rights creditor.
  • To measure the proper the loan amount for accomplishment of project works
  • Arrange the loan distribution at right time and sizeable instrument with preplanned objectives.
  • To help the applicants actively to collect the essential documents and paper for gating loan.
  • Directly visit on crops field for attaining information about the proper production of crops.
  • Trained the farmer how to cultivate and when collect the crop so that they can save times and reduce cost.
  • To provide the proper information’s to the farmers how to store the crops.
  • To provide information’s about current market price and sales process for selling so that they can get actual price for repayment instrument.


Supervision of dairy firm loan:


It is dairy firm is the fast growing cartable economic activities. Other hand it is considered an ideal food in urban area and it demands huge provide of dairy. For this reason govt. calls the rural credit institution to sanction the credit for dairy farm effective supervision on dairy loan in given below:




                        Identify the skilled loan applications who have experience about daring farm.


                        Help the applicants for collecting essential and proper information about daring farm project.


                        To help the officials who involve the project evaluation by collecting and proper information.


                        To gain the information about the applicants political, social and economical position to measure the strengths of loan user.


                        To direct supervision for setting up the dairy farm in right time and right place.


                        To influence the dairy farmer to take initiative against the dairy disease.


                        Influence the farmer to use the installment amount within the budget line.






Essential characteristics of successful rural credit supervisor


A good work could be vandalized because of unskilled and untrained worker. There is no suspicion that effective credit monitoring is essential for borrower as well as bank also. So, the person who is responsible for monitoring the rural credit should be skilled.


For this reason in order to successful and effective completion a rural credit supervisor should have many qualifications. In the following we have discuss some characteristics of rural credit supervisor.




(a)Taking assumption and general knowledge about the surroundings


It is well known that general knowledge is the base of all kinds of knowledge. Nobody can successful just gathering general knowledge. They also have knowledge about the political, social and science in order top succeed. So, by gathering such kind if knowledge a successful supervisor could be confident.


(b) Social skill


If a person wants to be socially accepted than he should possess the social skills. A rural credit supervisor tried to become acceptable friend of this society. A person who have good relations with the social people than more people accept their opinions, advice as well as proposal.


(c) leadership power : a successful rural caretaker should have leadership quality:


for this he must careful abvout the language, mode, time, and whom given the order advice about the credit


(d) technological knowledge:


in order to be successful completion technological knowledge is must. A rural credit caretaker should posses the following qualification:


                        A caretaker should have enough knowledge about the rules regulation, mode, objective , and project and essentials conditions


                        A caretaker should have enough knowledge about the rules and regulation, directions of the recruitment bank,


                        Knowledge about the consumer mode of production, project and development also mandatory.


                        Take training about the rural credit monitoring is also essential.


                        Power of evaluation, knowledge about proposed project and objective of loan is economically viable or not.






It is well known that experience give knowledge to the fool and unskilled might tbe skill by experience. So a person who acts as a caretaker for long time could successful rural credit caretaker.




Rural credit such as installment, distribution, collection, proper usage decision is mandatory for succeed. Credit consumers as well as bank both is squally face loses if decision is late.




Problems with rural credit monitoring:




Earlier it is mentioned that monitoring of rural credit is a new addition to the rural economy. Thus the idea of monitoring, its purpose, ways, rules and regulations etc are developing day by day. This idea is not yet familiar to the rural people. Whatever, for faithful monitoring of rural credit, there may arise many problems in its proper implementations.




The major problems are listed below:




                        Changing nature of monitoring concept:


The monitoring of rural credit is not fully scientific. Thus different country and different institutions in a country use this option differently. So there is probability of conflict regarding the implementation of this idea.




                        Lack of sufficient books:


As the idea is very new, thus there is scarcity of books on this issue. In such situation it is tough to properly train up the employees related with  monitoring process. But this situation is improving day by day.




                        Small amount of credit management:


For proper and faithful monitoring of rural credit, trained and skilled manpower is required. But it has been observed that most of the institutions are not interested to appoint adequate numbe3r of monitoring officer. So, with the limited number of monitoring officials it is not possible to do the job properly.




                        Inadequate monitoring:


To confirm whether the branch officials of rural monitoring doing there jobs properly; sudden inspection of branch manager is needed. The managers should visit and interact with the borrowers to ensure the quality of monitoring.


But it is observed that, this kind of monitoring is done very rarely. In such case, there is little scope of proper monitoring.




For proper monitoring the officials need to visit the houses of clients, into the field and project at any time. But in most of the time rural areas are no roads for transportation. Thus, most of the times officials fail to visit those areas. Besides this, for remote areas there is lack of transport facility such as: cycle, motorcycle and rickshaw.




                        Lack of supportive attitude:




Many officials do not consider the monitoring of credit as a social work thus they have lack of supportive attitude. They are not dedicated towards their job.


Thus, there is lack of supportive attitude from both ends.




                        Village politics and Competition:


For proper monitoring, the assistance of rural leaders such as member of union parishad or chairman of that region is essential. But it is observed that these leaders use these officials for illegal purposes. Thus, the main purpose of the monitoring is not achieved.




                        Lack of relative and adequate training:




We see those banks officials are working officials are working as monitoring officials after they received training on banking. But most of them are not adequately trained on rural credit monitoring. Thus there training often results irrelative and fails to accomplish the goal.




                        Monitoring Problem:


In past, there was no rural credit monitoring system. Thus, now it is expensive to bear the additional expenditure of the credit officials. For this reason many institutions are not interested to bear these expenses.




                        Location of creditors:


The debtors are located very regularly. Thus, it is difficult to locate and monitor each individual person with a few number of monitoring officials. Besides there is no formal group or institutions with which they can identify their problems.




                        Limited ability of monitoring officials:


Monitoring officials have no access incase of accepting rural credit, repayment scheduling, modifying the conditions of credit or even in decision making. They can only advice. Thus many times they cannot provide their valuable insights for the better off of monitoring.




Suggestions for effective rural credit:




For successful operation of monitoring there should be provision for effective solutions. Following are some suggestions in this regard:




                        Formation of rural credit regulation:


Although late, Bangladesh bank has prepared the regulations for rural credit. Monitoring of rural credit should be a part of that regulation. Here clear understanding of rural credit, it’s purpose, working are etc, should be demonstrated.




                        Purpose identification:


The purpose of rural credit monitoring is to ensure the proper utilization of loan. It aims at improving the living standard of creditor. This will help the debtor to repay his debt easily without default.




                        Purpose of monitoring:


Sudden inspection need to be done at branch offices to ensure whether the monitoring is done in proper way. Bangladesh Bank should take necessary steps to ensure the justification level.


                        Special event:


The people and officials involved in monitoring should have special training. So arrangement of special events can help. BIBM has taken initiatives to train up employees of each rural credit agencies. A major analysis regarding the problems and issues related to rural credit need to be done to find out a better solve.




                        Adequate number of monitoring officer:


There should be adequate number of monitoring officials appointed to accomplish the task. With the proportion of rural credit uses these should be adequate manpower to support them.


                        Transport facility:


Due to lack of transport facility many officials fail to monitor their clients timely. So every monitoring officer should be supported with transport facility according to their official ranking.


                        Assistance of leaders:


The local leaders should assist the monitoring officers. But it tis complained that most often they are not cooperative govt. should take realistic initiatives to solve the problem.


                        Monitoring Expenditure:


Monitoring officials should be SSC passed so that they can be easily trained and appointed at lower salary.




                        Rural credit groups:


Formatting of groups residing over different locations can help the monitoring officers. This group formation may be region based, professional based or even financial standard based. Monitoring officers can easily identify group problems if such groups are formed.




                        Decision making:


As the monitoring officers have practical experience, they should have the access in decision making.


                        Interaction with top management:


The field monitoring officers should have scope to interact with the top management. There they can represent their views to modify and improve the existing condition.




                        Ideal monitoring branch formation:


Each region should have one ideal monitoring branch. These branches should be provided with trained and skilled workers and supportive logistics.




                        Reward for the best:


For effective and successful monitoring, there should be provision for reward. This will enhance the spirit of the monitoring officers to dedicate them more and more.




                        New technology implementation:


Relatively chapter and new technology and inventions should be inspired by the monitoring officials. It will help the monitoring to become cost effective, develop and performed will lower expenditure.


                        Subsidy for monitoring:


The monitoring expense is high. So govt. should provide subsidy to support.




                        Rural credit in national level:


Overall aspects and problems of rural credit, evaluation, evaluation, analysis and solution should be given priority in national level.




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(Tk. In Crore)


Schedule of rural credit that was estimated in different time



                       Source                   Year of  Estimation             Quantity of Estimated Credit



1.       Credit Explorer Committee          1959                                  25% of  agricultural                                                                                                                                                                     production

2.       Pakistan Africulture Enumeration         1960                                                  142.80  


3.       Mr. Ershad Khan, Pakistan 1963,

Institution of economic development    1963                                                 185.00

4.       Mirza Shahjahan, Institution of

      Economic Research, Dhaka university   1967                                                 230.00

5.   Committee of Agriculture Credit                 1970                                                       182.00

6.  Bangladesh Planning Commission         1977-78           Agriculture 365.0}

      (Last year of 5th annual planning)                                  Non-agriculture 547.5}

7.   Bangladesh Planning Commission                                                                       430.00       

       (Biennial Planning)

8.    Bangladesh Planning Commission         1979-80                                          491.00

       (Biennial Planning)

9.     Bangladesh Planning Commission         1990                                                        8000.00

        (Last Year, 3rd 5th Annual Planning)


Aforementioned three estimated demand of agricultural credit and supply of credit deficit has been given below:


Year          Estimated            Real institutional         Deficit         Deficit relative to need    

                  Demand                       supply                                             (%)



1977-78      365                    138                        277                   75.89

1978-79      430                    153                        277                   64.42

1979-80      491                     260                       231                   47.05


                 *Bangladesh Bank, Department of Agricultural loan


In above mentioned loan deficit only total supply of agriculture loan has been shown against demand of agriculture loan. This deficit was 76% in the year of 1977-78, which decreased to 50% in the year of 1979-80. Knowledge on nature of deficit rural credit cannot be acquired from above explanation. It is very difficult to be known about the condition of such real deficit without an extensive scientific survey.