Credit And Marketing In Rural Areas

Rural growth depends first and foremost on a steady infusion of capital. Higher productivity in both farming and non-farm activity is impossible without money to invest, and rural households need it repeatedly through the year.

Credit: Farming carries a long gestation period — a large gap in time between sowing a crop and finally earning income once the produce is sold. During this interval the cultivator must still pay for seeds, fertilisers, implements and other inputs, as well as ordinary family expenses such as weddings, funerals and religious ceremonies. With little income of their own to bridge the gap, farmers are compelled to borrow.

At the time of Independence, the credit scene was dominated by moneylenders and traders. They lent to small and marginal farmers and to landless labourers at very high rates of interest and often manipulated the accounts, trapping borrowers in a cycle of debt they could never escape — the classic debt-trap.

A major turning point came after 1969, when India adopted social banking and a multi-agency approach to meet rural credit needs adequately. To coordinate the whole system, the National Bank for Agriculture and Rural Development (NABARD) was set up in 1982 as the apex body overseeing all institutions engaged in rural financing. The Green Revolution reinforced these changes: as farming became more input-intensive, rural credit shifted towards production-oriented lending.

The institutional structure of rural banking today rests on a set of multi-agency institutions, each expected to supply adequate credit at cheaper rates:

• Commercial banks
• Regional Rural Banks (RRBs)
• Cooperatives
• Land development banks

The formal system, however, left a gap. Because lending usually requires some form of collateral, a vast number of poor rural households were automatically shut out of the credit network, and the formal machinery was neither adequate nor well integrated with rural social and community development.

Self-Help Groups (SHGs) emerged to fill this gap. Each member contributes a small minimum amount, building up a common pool of savings (thrift). From this pool, credit is advanced to needy members, to be repaid in small instalments at reasonable rates of interest. By May 2019 nearly 6 crore women in India had joined about 54 lakh women's SHGs. In recent years roughly 10,000 to 15,000 rupees per SHG, plus about 2.5 lakh rupees per SHG as a Community Investment Support Fund (CISF), are provided to help members take up self-employment for income generation. Such small-scale lending is generally called a micro-credit programme.

SHGs have done much to empower women. A common criticism is that the borrowings are used mainly for consumption rather than productive, income-generating purposes — a limitation the programme still struggles with.

Rural Banking — a Critical Appraisal: The rapid spread of the banking system after Independence, especially after the Green Revolution, had a clearly positive effect on the rural economy — but the record is a mixed one, and this section weighs the gains against the failures.

The expansion of banking lifted rural farm and non-farm output, income and employment. It allowed farmers to reach a variety of services and credit facilities and to obtain many kinds of loans to meet their production needs. One of its most striking achievements is that famines, once a recurring tragedy, have become events of the past — India has achieved food security, reflected in the abundant buffer stocks of grains the country now holds.

However, all is not well with the banking system. With the possible exception of the commercial banks, the other formal institutions have not developed a healthy banking culture. Three linked weaknesses stand out:

• Failure to develop a culture of deposit mobilisation (encouraging people to save with the bank).
• Weakness in lending to genuinely worthwhile borrowers.
• Poor loan recovery, with chronically high default rates on agricultural loans.

It is sometimes alleged that farmers deliberately refuse to repay. In reality, defaults are often driven by crop failure and by insufficient income and employment, which leave borrowers unable to pay back even when they wish to. As a result of these problems, the expansion and promotion of the rural banking sector lost momentum and took a backseat after the economic reforms.

The darkest expression of rural indebtedness has been farmer suicides. Many farmers who had borrowed for farming and other purposes, and then could not repay because of crop failure and poor income and employment opportunities, took their own lives. This underlines why the design of rural credit and loan-recovery policy is not merely a financial question but a question of livelihoods and dignity.