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ACCESS TO RURAL CREDIT : CHALLENGES & SOLUTIONS
Relevance: GS – 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Why in the News?
- With the primary goal is to fast-track the growth of the rural economy the Budget 2024-25 has been introduced.
- Aiming to generate large-scale employment opportunities.
- A provision of ₹2.66 lakh crore has been made for rural development, including rural infrastructure this year.
Rural Credit Delivery System in India
- Credit is essential for adopting technology and increasing input use in agriculture, contributing to rural development.
- Various agencies involved in the rural credit delivery system include:
- Commercial banks
- Regional Rural Banks (RRBs)
- Co-operatives
- Small Finance Banks (SFBs)
- Non-Banking Financial Companies (NBFCs)
- Micro-Finance Institutions (MFIs)
- Indigenous bankers
- Since independence, the Government of India (GoI), the Reserve Bank of India (RBI), and other financial institutions have worked to reduce the share of non-institutional credit in agriculture.
- Multiple committees have been established to recommend ways to increase institutional credit in agriculture and rural areas, including:
- V. Gupta Committee on Agricultural Credit through Commercial Banks
- Vikhe Patil Committee on Cooperatives
- S. Vyas Advisory Committee on Flow of Credit to Agriculture
- Vaidyanathan Task Force on Revival of Co-operative Credit Institutions
- The GoI has accepted many of these recommendations and implemented suggested reforms.
- Key initiatives taken include:
- Acceptance of the Rural Credit Survey Committee Report (1954)
- Nationalization of commercial banks in 1969 and 1980
- Establishment of Regional Rural Banks (RRBs) in 1975
- Establishment of the National Bank for Agriculture and Rural Development (NABARD) in 1982
Schemes to Increase Credit Penetration in Agriculture
- In addition to institutional changes, GoI, RBI, and NABARD have introduced multiple schemes to enhance credit penetration in agriculture.
- Key initiatives include:
- Establishment of the Lead Bank Scheme
- Provision of priority sector lending
- Self-Help Group – Bank Linkage Programme (SHG-BLP)
- Lending to Joint Liability Groups (JLGs)
- Kisan Credit Card Scheme
- Rural Infrastructure Development Fund (RIDF)
- Since the formation of NABARD, credit flow to the agriculture sector has increased significantly.
- Total credit flow in agriculture rose from ₹4,352 crore in 1982-83 to ₹15,58,831 crore in 2020-21.
Challenges to Access to Rural Credit
- Inadequate Reach and Accessibility: Many rural areas lack access to formal credit institutions, with banks concentrated in urban regions.
- For example, a farmer in a remote village may have to travel over 50 kilometers to reach the nearest bank branch, limiting their ability to secure loans.
- High Interest Rates: Informal lenders often dominate the rural credit market, charging exorbitant interest rates.
- A farmer might turn to a local moneylender who charges up to 30% interest, compared to the 10-12% offered by formal banks, making loans unaffordable.
- Collateral Requirements: Formal financial institutions typically require substantial collateral for loans, which many rural households cannot provide.
- For instance, a small farmer may not have land titles or other assets to secure a loan, preventing access to necessary funds.
- Credit for Non-Agricultural Purposes: There is a lack of credit options for non-agricultural needs such as education or small business development.
- A rural entrepreneur looking to start a small shop may find it difficult to secure funding due to the focus on agricultural loans.
- Seasonal Fluctuations: The seasonal nature of agriculture leads to irregular income streams, making loan repayments challenging.
- A farmer may struggle to repay loans during the off-season when income is low, increasing the risk of default.
- Lack of Financial Literacy: Limited financial literacy among rural populations can result in misunderstandings about loan terms.
- For example, a farmer may not fully grasp the implications of taking a high-interest loan, leading to poor financial decisions and potential debt traps.
- Fraud and Corruption: Instances of corruption in rural credit distribution are common, with intermediaries demanding bribes for loan approvals.
- A farmer may find that their application is delayed unless they pay an unofficial fee, complicating access to credit.
- Poor Infrastructure: Inadequate infrastructure, such as poor road conditions and lack of telecommunications, hampers the distribution and monitoring of credit in rural areas.
- For instance, a bank may find it costly to service loans in areas without reliable roads, leading to higher operational costs.
- Institutional Coverage Gaps: The existing institutional credit arrangements are often insufficient to meet the growing needs of rural farmers. Many small farmers are left out of the credit system, while larger, more established farmers receive more attention and resources.
- Red Tape and Bureaucracy: The process of obtaining loans is often mired in bureaucratic red tape, discouraging farmers from applying. Lengthy application processes and complex documentation requirements can lead to farmers relying on informal sources instead.
Solutions to Increase the Access to Rural credit
- Expand Formal Financial Institutions: Increase the number of bank branches and financial institutions in rural areas.
- For example, establishing mobile banking units can provide access to financial services in remote locations, allowing farmers to apply for loans without traveling long distances.
- Microfinance Initiatives: Promote microfinance institutions that cater specifically to the needs of rural borrowers.
- For instance, organizations like Grameen Bank provide small loans to low-income individuals, enabling them to start small businesses or invest in agriculture.
- Utilize Technology for Credit Assessment: Implement digital tools for credit scoring and risk assessment.
- Companies like SatSure use satellite data to assess agricultural risks, allowing banks to make informed lending decisions without the high costs of traditional assessments.
- Financial Literacy Programs: Develop and implement financial education programs tailored for rural populations.
- For example, workshops that teach budgeting, savings, and loan management can empower individuals to make informed financial decisions.
- Flexible Collateral Options: Encourage lenders to accept alternative forms of collateral, such as future crop yields or livestock. This approach can help farmers who lack traditional assets secure necessary loans.
- Government Subsidies and Support: Increase government incentives for banks to lend to rural areas, such as interest subsidies or guarantees.
- For instance, the Reserve Bank of India’s mandate for banks to allocate a portion of their lending to agriculture can help ensure more funds reach rural borrowers.
- Community Development Financial Institutions (CDFIs): Support the establishment of CDFIs that focus on providing credit to underserved communities. These institutions can tailor their services to meet the unique needs of rural residents, such as offering lower interest rates and more lenient repayment terms.
- Partnerships with Local Organizations: Collaborate with local NGOs and community groups to promote access to credit.
- For example, partnerships can facilitate outreach and education efforts, ensuring that residents understand available financial products and services.
- Improve Infrastructure: Invest in rural infrastructure to enhance connectivity and access to financial services. Improved roads and internet access can enable better communication between lenders and borrowers, facilitating loan applications and repayments.
- Regulatory Reforms: Advocate for regulatory changes that simplify the loan application process and reduce bureaucratic hurdles. Streamlining procedures can make it easier for rural residents to access credit, such as reducing paperwork requirements for small loans.
Alternative articles
https://universalinstitutions.com/financial-institutions-in-india/
https://universalinstitutions.com/national-conclave-of-primary-agricultural-credit-societies-pacs/
Mains question
Discuss the role of institutional changes in increasing credit penetration in India’s Rural Sector. Highlight key initiatives and their impacts. (250 words)
