RURAL CREDIT

Rural Credit

• Growth of the rural economy depends on the timely infusion of capital, to realize higher productivity in agriculture and non-agriculture sectors.
• In agriculture, farmers are in strong need of creant due to the long time gap between crop sowing and realization of income.
• Farmers borrow from various sources to meet initial investments on seeds, fertilizers, implements and other family expenses of marriage, death, religious ceremonies, etc.
• So, credit is one of the important factors, which contribute to agricultural production. An efficient and effective rural credit delivery system is crucial for raising agricultural productivity and incomes.

Sources of Rural Credit

There are two sources, from which the farmers can raise loans:

• Non-Institutional Sources
• Institutional Sources

Non-Institutional Sources

Non-institutional sources have been the traditional source of agricultural credit in India. Major non-institutional sources are:

1. Moneylenders: From the very beginning, moneylenders have been advancing a major sh. of farm credit. The peasants are exploited through exorbitant (very high) rates of interest. Quite frequently, their accounts are manipulated without their knowledge.
2. Relatives: Cultivators borrow funds from their own relatives in times of crisis. These loans are a kind of informal loans and carry no interest and are normally returned after harvest.
3. Traders and commission agents: They provide credit to the peasants on the mortgage crops at high rates of interest, on the condition, that the crops will be sold to them at low prices.
4. Rich Landlords: Small as well as marginal farmers and tenants take loans from landlords for meeting their financial requirements. Landlords also charge high rates of interest on such loans and exploit the peasants, particularly small farmers and tenants.

Institutional Sources

The various non-institutional sources were used to exploit small and marginal farmers by lending to them at high-interest rates and by manipulating the accounts to keep them in a debt-trap.Ă major change occurred after 1969 when India adopted the institutional credit approach through various agencies.

Government established the institutional sources with the following objectives:

• To provide adequate credit to farmers at a cheaper interest rate
• To assist small and marginal farmers in raising their agricultural productivity and maximizing their income. Some of the important institutional sources of agricultural credit are:

1. Co-operative Credit: The primary objective of the co-operatives is to liberate the Indian peasantry from the clutches of moneylenders and to provide them credit at low rates of interest.
2. Land Development Banks: They provide credit to the farmers against the mortgage of their lands. Loans are provided for permanent improvement of land, purchasing agricultural implements and repaying old debts.
3. Commercial Bank Credit: Initially, commercial banks played a marginal role in advancing; rural credit. However, after nationalization in 1969, they expanded their branches in rural areas and started directly financing the farmers.
4. Regional Rural Banks: They are opened up in those areas where there are no bank facilities. Their main objective is to provide credit and other facilities, especially to small and marginal farmers, agricultural laborers, artisans and small entrepreneurs in rural areas.
5. The Government: The loans provided by the government are known as taccavi loans and are lent during emergencies or distress, like famines, floods, etc. The rate of interest charged against such a loan is as low as 6%.
6. National Bank for Agricultural and Rural Development (NABARD): It is the Apex Bank that coordinates the functioning of different financial institutions, working for the expansion of rural credit.
   1. Its objective is to promote the health and strength of credit institutions (namely, cooperatives, commercial banks and regional rural banks).
   2. Besides providing finance to credit institutions, NABARD also provides financial assistance to the non-farm sector, to promote integrated rural development and prosperity of backward rural areas.
7. Self-Help Group (SHG) Bank Linkages Programme for Micro Finance: SHG has emerged as the major microfinance program in the country in recent years.
   1. Their focus is largely on those rural poor, who have no sustainable access to the formal banking system.
   2. So, their target groups comprise small and marginal farmers, agricultural and nonagricultural laborers, artisans, etc.
   3. SHGs promote thrift in small proportions by a minimum contribution from each member. • From the pooled money, credit is given to the needy members at reasonable interest rates, which is to be repaid in small installments
   4. By March 2012. more than forty-three lakh SHGs had reportedly been credit-linked.
   5. SHGs have also helped in the empowerment of women. However, the borrowings are mainly confined to consumption purposes and a negligible proportion is borrowed for productive purposes.

Critical Appraisal of Rural Banking

Rapid expansion of the banking system had a positive effect on a rural farm and non-farm output, income and employment. After the green revolution, credit facilities helped famines avail a variety of loans for meeting their production needs. With buffer stocks of grains, famines became events of the past.

Some of the problems faced in rural banking are:

1. Insufficiency: The volume of rural credit in the country is still insufficient in comparison to its demand.
2. Inadequate Coverage of institutional sources: The institutional credit arrangement continues to be inadequate as they have failed to cover the entire rural farmers of the country.
3. Inadequate Amount of Sanction: The amount of loan sanctioned to the farmers is also inadequate. As a result, farmers often divert such loans for unproductive purposes, which dilute the very purpose of such loans.
4. Less attention to poor or marginal farmers: Lesser attention has been given to the credit requirements of needy (small and marginal) farmers. On the other hand, well-to-do farmers are getting more attention due to better creditworthiness.
5. Growing Overdue: The problem of overdue agricultural credit continues to be an area of concern.
   1. The basic reason for growing overdue is the poor repaying capacity of farmers. As a result, credit agencies are becoming cautious about granting loans to farmers.
   2. Agriculture loan default rates have been chronically high. It is alleged that farmers are deliberately refusing to pay back loans. It is a threat to the smooth functioning of banking system and needs to be controlled.

2. Except the commercial banks, other formal institutions failed to develop a culture of deposit mobilization, lending to needy borrowers and effective loan recovery.

To improve the situation:

1. Banks need to change their approach from just being lenders to building up relationship banking with the borrowers; and
2. Farmers should also be encouraged to inculcate the habit of thrift (saving) and efficient utilization of financial resources.