RURAL CREDIT SYSTEM

Money lenders in India are as old as its villages, agricultural credit cooperatives go back a century, commercial banks have been involved in agricultural loans for nearly 50 years, the regional rural bank network is over 25 years old, and reforms in the banking system were triggered a decade back. Yet, credit flow to small farmers has remained far below needs, both for crop cultivation and for long term requirements such as land development, irrigation and farm equipment as compared to the potential demand. The widespread discontent among farmers has manifested itself in the form of mass voting against incumbent governments as also individual acts of despair such as farmers committing suicide, particularly in States like Andhra Pradesh and Maharashtra.

The basic architecture of the credit system is:

• Cooperative credit structure (CCS): The Cooperative Credit Structure caters to both the short term and long term credit need of the rural consumers. The short term credit need of the rural consumers is fulfilled by three institutions, namely, the State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs) and the large network of the Primary Agricultural Credit Societies (PACS) in the villages. On the other hand, the State Cooperative Agriculture and Rural Development Banks (SCARDBs) provide long term credit in the rural economy through Primary Land Development Banks, now renamed Primary Cooperative Agriculture and Rural Development Banks (PCARDBs). In Andhra Pradesh and Jharkhand the long term structure has been merged with the short term structure.
• National Bank of Agricultural and Rural Development (NABARD): This is refibnanced by CCS .These institutions are, however, beset with problems like low recovery percentage (40-60%), inefficient management systems and politicization of the cooperatives due to inadequate laws prevalent in the system. In 2001-02, there were over 98,000 primary agricultural cooperatives and the loan outstanding was Rs 32712 crore. In addition, the cooperative sector also had Rs 14,172 crore of long term loans given for land and water development, tractors, etc.
• Commercial Banks: The involvement of commercial banks in credit to agriculture began after the Gorawala Committee Report in 1954. The State Bank of India was asked to open 400 branches in semi-urban areas and start agricultural lending. The issue became urgent with the onset of the Green Revolution, as the package of high yielding variety seeds and fertilisers required access to credit. The government responded by first directing banks to lend to agriculture, then imposing ‘social control’ and eventually nationalising the major banks in 1971. This was followed by a major expansion in rural branches and introduction of the Lead Bank scheme and district credit plans. Within the overall quota of 40% priority sector lending, banks were asked to lend 18% of their total advances to agriculture. The number of commercial bank branches as also the share of commercial banks in agricultural credit kept rising, particularly as cooperative credit structure in many states was not working well. This trend remained till the late 1980s, when the Agriculture and Rural Debt Relief Scheme, 1989 was announced by the then government resulting in a waiving of all loans below Rs 10,000. This created repayment problems for banks and generally discouraged them from further lending.
• Regional Rural Banks (RRBs): In 1972, the Banking Commission observed that despite massive expansion of the network of commercial banks consequent to nationalisation, there was still a need for having a specialised network of bank branches to cater to the needs of the rural poor. With this premise, RRBs were established in India under the RRB Act, 1976. The thinking was to set up RRBs as rural-oriented commercial banks with the low cost profile of cooperatives but the professional discipline and modern outlook of commercial banks.
  Between 1975 and 1987, 196 RRBs were established with over 14,000 branches. A large number of branches of RRBs were opened in the hitherto un-banked or under-banked areas providing services to the interior and far-flung areas of the country. RRBs were expected to primarily cover small and marginal farmers, landless labourers, rural artisans, small traders and other weaker sections of the rural community. However, even after so many years, the market share of RRBs in rural credit remains low. At present, the RRBs share in agriculture credit is 8% while that of commercial banks is about 50% and that of CCS is 42%.In the very first decade of the setting up of RRBs, 152 out of 188 RRBs had accumulated losses of Rs 340 crore. The losses went up sharply in 1992 on account of implementation of the National Industrial Tribunal Award bringing parity in wage structure of RRBs with that of commercial banks. This negated the low cost structure of RRBs and more losses were accumulated. The government took note of the grim situation of RRBs and several committees were set up to look into various problems and issues faced by RRBs. Over the period 1994-2000, 187 RRBs were provided with a total of Rs 2188 crore for recapitalisation. However, their financial viability continues to be overstretched by policy rigidities coupled with a lower capital base in an environment of inadequate infrastructure and deep social and economic disparities.
• Micro Finance Institutions (MFIs): Even as banks are physically present in rural areas and offer concessional interest rates, small farmers are unable to access them because of borrower-unfriendly products and procedures, inflexibility and delay, and high transaction costs, both legitimate and illegal. It was in this context that NGOs began to examine alternative ways to enhance access to credit by the poor since the mid-1970s. After pioneering efforts by organisations like SEWA, MYRADA, PRADAN and CDF, in 1992 the RBI and NABARD encouraged commercial banks to link up with NGOs to establish and finance self-help groups of the poor.
• Informal Sources: RBI data reveals that informal sources provide a significant part of the total credit needs of the rural population. The magnitude of the dependence of the rural poor on informal sources of credit can be seen from the findings of the successive All India Debt and Investment Surveys (AIDIS). These show that the share of non-institutional agencies (informal sector) in the outstanding cash dues of rural households has reduced from 83.7% in 1961 to 36% in 1991. As per the latest AIDIS, 1992, formal institutional sources, banks and cooperatives provided credit support to almost 64% of the rural households, while professional and agricultural moneylenders extend credit to about one sixth of the rural
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  households.

(Vijay Mahajan and Bharti Gupta Ramola. ‘Financial Services for the Rural Poor and Women in India: Access and Sustainability,’ Journal of International Development 8(2), 1996, 211-24.)