The role of public investment in agricultural capital formation has declined even sharper. The fall would have been sharper but for the private investment which has filled the gap. This raises the question about the complementarities between private and public investment. Even more important is the determinants of the capital formation. Traditionally banks have played a role in capital formation. Interestingly the capital formation has alos happened through informal channels for which very little data is available. The paper examines the impact of bank lending on capital formation and consequent impact on the production. The correlation between the direct and indirect bank credit on the capital formation is 93% and coefficient of determination is 88%. Our studies show that there is an influence on bank lending on capital formation both public and private which consequently impacts the production patterns. Capital formation does lead to increase in production. There is a strong correlation between the public and private capital formation and agricultural production. The impact as measured by the coefficient of determination is less than 50%.

1. 1
Does Bank Lending Influence
Capital Formation and
Agricultural Production ?
OBJECTIVES
• To examine the patterns in public and
private capital formation in the
agricultural sector.
– The role of banks in capital formation.
• The impact of the above on the
agricultural production
• Analyzing the gaps in the existing
model and recommendations.

2. 2
Some Studies
• Ghulati and Bhalta (2002)
Stagnation of capital formation in
agriculture.
Public sector investment has declined in
real terms while private sector has not
been able to fill this gap.
The extent of deceleration, in particular on
public sector account and further the
reasons for the decline.
They examine the temporal behavior and
structure of public and private GCFA.

3. 3
• Purohit and Reddy (1999)
Existence of high complementarities
between public and private capital
formation
Variations across the Indian states both in
their agricultural development and capital
formation
• Sharma, et al (2000)
– Conceptual aspects of overdues, recovery
and prudential norms,
– Impact of NPAs on health of Rural FIs.
– Analyze the patterns of NPAs
• Impact on the recovery of loans in these
institutions.

4. 4
• Ghulati and Bhalta (2002)
– Loan disbursements of RFIs have
increased
– NPAs too have shown a corresponding
increase.
– Bad debt as percentage of loans
outstanding increased from 3.58 in 1980 to
4.2 in 1992 and declined thereafter.
DATA SET

5. 5
285207078152491526103-04
236905685743591388102-03
182384658149691225001-02
188254048539271298000-01
129683646642211308399-00
81173309438701102598-99
63352944339791196397-98
49862744846681150896-97
36742381448491084195-96
11891614543951044190-91
Indirect
Finance
Direct
FinancePublicPrivateYears
1.3104-05
1.2703-04
1.2401-02
1.2800-01
1.3799-00
1.2698-99
1.4397-98
1.5196-97
1.5795-96
1.9290-91
% of GDPyear

6. 6
Bank Lending to agriculture
0
10000
20000
30000
40000
50000
60000
70000
1 2 3 4 5 6 7 8
Years
Banklendingdirectand
indirect
Indirect lending
Direct lending
1432.5852491526110
1436.364359138819
1494.624969122508
1482.943927129807
1460.574221130836
1475.423870110255
1361.703979119634
1313.064668115083
1304.444849108412
1169.364395104411
PRODUCTIONyear
PUBLIC
CAPITAL
FORMATION
PRIVATE
CAPITAL
FORMATION

7. 7
PRIVATE CAPITAL FORMATION
0
5000
10000
15000
20000
1 2 3 4 5 6 7 8 9 10
YEARS
CAPITAL
FORMATION
Series1
PUBLIC CAPITAL FORMATION
0
1000
2000
3000
4000
5000
6000
1 2 3 4 5 6 7 8 9 10
YEARS
CAPITAL
FORMATION
Series1

8. 8
ANALYSIS
OLS MODEL
0.14562.56860.42330.6506Prod
0.2971.44740.29260.5409Public CF
0.00056126.21180.88220.9393Private CF
R2R
SIGNIFIC
ANCE
F-
value
COEFFICIENT
OF
DETERMINATION
CORELATION
COEFFICIENTFUNCTIONS

9. 9
• Bank lending is showing an increase.
• NPAs shows a decline.
• Increasing trend towards direct credit compared to
the indirect mode.
• The private bank lending moving upwards.
– Likely to ease the pressure on the co-operative
banks which had borne the brunt of lending
towards farm operations
• The association exists between the two components
of capital formation viz. public and private capital
formation.
• There is an influence on bank lending on
capital formation both public and private
– Consequent impact on the production patterns.
• Importance of finance cannot be
underestimated
– Provide the context for banks to step up their
lending mechanisms.
• Movement from informal to formal lending
mechanism

10. 10
• Capital formation depends also on
other factors which we have not taken
into account.
• Agricultural lending still remains a
domain of the informal sector.
• Very few studies have been undertaken.
• The need to bring this sector to mainstream
• No reliable data sources to measure its role
• Bank lending influences private capital
formation highly.
– The correlation between the direct and
indirect bank credit on the capital formation
is 93% and coefficient of determination is
88%.
• Measuring the impact of direct and indirect
bank lending on public capital formation is
comparatively lower.
• The association as measured by the coefficient
of determination is only 29%.

11. 11
• Capital formation does lead to increase in
production.
• There is a strong correlation between the public and
private capital formation and agricultural production.
• The impact as measured by the coefficient of
determination is less than 50% .
• Production is subjected in different degrees to
influences from land salinity, rainfall and labor costs.
THANK YOU
PRESENTED BY:
NAMRATA
CHOUDHARY