Rural credit system is not working

Moneylenders are their bane

Published: Tuesday 31 October 2006

Rural credit system is not working

-- The recent spate of farmer's suicides in Vidharbha have once again thrown the spotlight on faultlines in Indian agriculture. Farmer's suicides are, of course, not the only indicators of agrarian distress. But they do bring into sharp focus how the rural credit system -- or the absence of it -- works against agriculturists

More often than not, farmers who took the extreme step had borrowed from informal sources at exorbitant rates of interest. According to the 59th round data of the National Sample Survey, the 'agricultural/ professional money lender' was the most important source of loan for agriculturists in the country. In 2003, 29 per cent of all indebted farmer households in the country had borrowed from village moneylenders. Such dependence cannot be delinked from deliberate policy choices in banking and financial sectors. In the post-economic reform period, there has been a structural deterioration in distribution of bank credit to the rural/agricultural sector. The share of bank branches in rural areas has declined, the credit-deposit ratio of the rural branches has decreased, particularly in the country's eastern region, and more importantly the share of agriculture in total bank credit has declined from 15.9 per cent in March 1990 to 9.9 per cent in March 2000.

Today, the conventional notion of agrarian distress as being part of the broader landscape of underdeveloped agriculture and backwardness no longer holds true. Agrarian distress and indebtedness has also been reported from regions where agriculture has attained a high degree of commercialisation, where technology use is relatively better and the cropping pattern is diversified. So, agrarian distress in rural India seems to have at least two important dimensions: distress under backwardness and distress under commercialisation.

My studies on the informal credit market in three villages of Sambalpur, Bargarh and Kalahandi districts of Orissa throw up some interesting insights on the way inputs (land, labour, credit, fertilisers, pesticides) and outputs (mainly paddy) get contractually interlinked. This is referred to as interlinkage in specialist literature.

The data shows that the poor and the marginalised peasants borrow more from the informal credit market. Of course, a sizeable percentage of large farmers also borrow from the informal sources, particularly in the irrigated villages. Access to formal credit is typically low for the landless labourers and small farmers.

For the landless labourers and the marginal farmers, moneylenders and shopkeepers are the two most important sources of borrowing, while small and semi-medium farmers borrow largely from traders -- besides the moneylender. Traders are the also most important source of informal credit for medium and large farmers.

One key finding of the study is that scheduled caste and scheduled tribe households as well as landless labourer and small farmers, pay higher interest rates within the interlinked transactions, in comparison with others.

Linked borrowers typically sell their output at a lower price than others; the price difference is highest in the backward un-irrigated village and lowest in the advanced irrigated village. It is important to note that all interlinked transactions are not uniformly disadvantageous to all class of farmers; much depends on the relative resource-endowment positions and fall-back position of the borrowers.

Although lack of access to cheap (not just in terms of interest rates but also in terms of transaction and other costs of getting credit), dependable and timely credit has acted as a major catalyst of the current agrarian crisis, it is important to note that the factors which has generated and sustained distress of such magnitude are, at least partly, structural and it requires more than cosmetic and one-time 'miracle packages' to address these issues. Consider, for example the following data from the National Sample Survey: at the all-India level, the most important source of information regarding 'modern agricultural technology' is 'other progressive farmers' followed by the 'input dealer'. In Andhra Pradesh, where 66 percent of indebted farmers have borrowed either from a moneylender or a trader, as high as 30 per cent of farmers depend on the input-dealer for such information. The inherent information asymmetry that characterises such a situation plays a role in forcing the farmers to enter into exploitative interlinked transactions. Interventions to address the agrarian distress, in the minimum, need to be based on a two-prong strategy: one, a fire-fighting approach to stop the situation from deteriorating further; and a long-term strategy to find durable and equitable solutions to the fundamental problems facing the Indian farmer in the context of globalisation.

Deepak K Mishra is with the Centre for the Study of Regional Development, Jawaharlal Nehru University, New Delhi

Subscribe to Daily Newsletter :

Comments are moderated and will be published only after the site moderator’s approval. Please use a genuine email ID and provide your name. Selected comments may also be used in the ‘Letters’ section of the Down To Earth print edition.