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Rural credit: a source of sustainable livelihood of rural India

Sunildro L.S. Akoijam
Department of Management, North-Eastern Hill University (NEHU), Tura Campus, Tura, India
Abstract
Purpose The purpose of this paper is to analyse the issues and concerns of Indian rural credit, which is a powerful tool for enhancing production and productivity and for poverty alleviation. Further it highlights some of the strategies adopted by Reserve Bank of India (RBI) to increase the rural credit facilities in the rural area of India. Design/methodology/approach The various tools of rural credit are analysed in detail. The Regional Rural Bank (RRB) who play a vital role in increasing the rural credits is studied. Self Help Group (SHG)-Bank Linkage model of NABARD which creates an interface of the informal arrangements of the poor with the banking system is also analysed in detail. Findings Rural credits serve as a tool for providing a sustainable livelihood for millions of rural Indians who dont have a means of livelihood. Several organisations like RRBs, Micronance Institutions, NABARD, etc. are playing a major role in providing rural credit facilities to rural India. Reserve Bank of India (RBI) is formulating and regulating the policies and procedure to make the rural credit facilities available to most of the needy. In spite of several efforts put up by various organisations to increase the rural credit facilities, several challenges will prevail in the years to come. Originality/value These aspects of the nancial sector remain undervalued in mainstream literature on rural credit. With India being a nation in which more than 70 percent of people live in rural areas and rural credit being a powerful, and the only, tool for rural people in providing a means of livelihood, its importance and potential should be known to each individual. Keywords Banking system, Credit, RBI, RRB, Rural, SHG, Banking, Rural regions, Poverty, India Paper type Viewpoint

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Introduction India is essentially the rural India and rural India is virtually the cultivator, the village handicraftsman and the agricultural labourer. Rural India where 70 per cent of all Indians live, still depends heavily on agriculture. However, it is increasingly becoming one of the most diversied markets with a strong demand for credit for agriculture and non agricultural purposes, savings, insurance and money transfers. Both policy and institutional, during pre and post reform periods; dwell on the concerns relating to nancial exclusion and touch upon the Self Help Group (SHG)-bank linkage model, which is a meaningful inclusive response to this concern. In the development strategy adopted by independent India, the primary focus was growth with equity. Given an understanding of the seasonal credit requirements of farm operations, institutional credit was perceived fairly early in the development process as a powerful tool for enhancing production and productivity and for poverty alleviation. To achieve the objectives of production and productivity, the stance of policy towards rural credit was to ensure provision of sufcient and timely credit at reasonable rates

International Journal of Social Economics Vol. 40 No. 1, 2013 pp. 83-97 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068291311283454

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of interest to as large a segment of rural population as possible. The strategy devised for the purpose rested on three pillars; expansion of the institutional structure, directed lending to disadvantaged borrowers and sectors and lower interest rates. This brief overview of rural credit in India begins in the nineteenth century and ends in the twenty-rst century but it is primarily concerned with the major episodes of twentieth century. The historical narrative pays close attention in each case to the perspectives that informed changes in policy and also documents the impact of these changes. The description of rural credit began in the late colonial period. The problems faced by Indias villages display a remarkable continuity from this kind of situation throughout the period being studied. Dependence on unsurious moneylenders and the operation of a deeply exploitative grid of interlocked, imperfect market aficts the rural poor. After a review of the weak performance of co-operative credit institutions in India, it is articulate the theoretical case for nationalisation of banks in 1969 and document its positive impact on rural credit and economic development. However, it is also suggested that certain excessed in the two decades following nationalisation created a basis for the reforms unleashed in the 1990s. While these reforms have undoubtedly increased bank protability, their impact on availability of affordable rural credit to the poor and Indias backward regions, has been extremely adverse. There are several concerns in relations to rural credit which are generally expressed in terms of inadequacy, constraints on timely availability, high cost, neglect of small and marginal farmers, low credit-deposit ratios in several states and continued presence of informal markets. It is held that while the commercial banks are more focused in improving efciency and protability, they have tended to give comparatively less priority to rural credit. Regional rural banks (RRBs) and co-operatives appear to face serious consequences of governance as well as operational efciency. It is argued that most part of the co-operative credit structure is multi-layered under capitalised, over staffed and under skilled, often with mounting non-performing assets while in a few cases resulting in erosion of public deposits as well. Many of RRbs also appear to share most of these problems, though there are some vibrant and viable institutions in this category. Such problems relating to rural credit have been well documented and several policy approaches were made to remedy the situation. However, there is some element of dissatisfaction that overall situation in regard to rural credit is not improving to the desired level inspite of such series of actions. It is a matter of concern that cognizable success is eluding the policy makers, at time when increasing commercialization warrants a big thrust in institutional credit to agriculture. Hence, there is dicernible widespread intellectual recognition that while immediate measures are undertaken to increase the ow of credit to a poor individual. Professor C.H. Hanumantha Rao, Policy issues relating to irrigation and rural credit in India (1993) makes a comprehensive analysis of problems, prospects and tasks relating to rural credit and nancial system of India. Professor C.H. Hanumantha Rao, Reform agenda for agriculture (2003) proposes specic credit reforms in the light of experience gained and makes a strong pitch for a major change in the mindset. Shri M. Narasimham Garu, the Bhishma-Pitamaha of the Financial Sector Reforms in India (1991) recommended redening of and reduction in priority-sector lending, describing some of it as behest lending. Professor Rao disagreed (1993) with him on redening priority-sector lending though there was agreement between the two on phasing out of concessional rates of interest.

The moneylenders have made a denite comeback. The attempt of micronance sector to address this crisis has been appraised through an examination of its two main approaches. It is suggested that while the micronance institution (MFI) model is unsuitable and might actually end up worsening the situation for the poor, the SHG-bank linkage (SBL) approach has the potential to make a decisive impact on security and empowerment of the most disadvantaged in the current context of farmers suicides. It may also be critical in positively inuencing protability of banks in remote rural areas. Finally, after much argument it is concluded that micronance is needed to overcome the problems that have persisted over the last ten decades. Issues and concerns The rural credit set-up, broadly speaking, suffers from the following ills: . proliferation of rural credit institutions resulting in costly and wasteful system; . inadequacy of staff compared with the volume of lending operations under mass-loaning programmes and lack of staff motivation, resulting in poor quality of loaning; . undue emphasis on credit while neglecting equally important non-credit supporting services essential for successful rural lending; . political and vested interest pressures resulting in poor quality of lending and mounting overdues; and . lower lending rates leading to nancial weakness and danger of loss, to the institutions. The signicant increase in the credit ow from institutional sources brought forth a strong sense of expectation from the public sector banks. However, this expectation could not be sustained as the emphasis throughout was on achieving certain quantitative targets. As a consequence, inadequate attention was paid to the qualitative aspects of lending resulting in loan defaults and erosion of repayment ethics, to a greater or lesser extent, by all categories of borrowers. The end result was a disturbing growth in overdues, which not only hampered the recycling of scarce resources of banks, but also affected protability and viability of nancial institutions. Ultimately, nancial deepening occurred but the development impact of rural nance was blunted. In 1991 that is on the eve of reforms the rural credit-delivery system was in poor shape. The basic aim of the nancial sector reforms was to improve the soundness, efciency and productivity of all credit institutions, including rural credit institutions whose nancial health was far from satisfactory. The reforms sought to enhance the areas of commercial freedom, increase their outreach to the poor and stimulate additional ows to the sector. The reform programme also included far reaching changes in the incentive regime through liberalising interest rates for co-operatives and RRBs, relaxing controls on where, for what purpose and whom rural nancial institutions could lend, introducing prudential norms and restructuring and recapitalising of RRBs. As a result of the reform process, the nancial health of commercial banks has improved in terms of parameters such as capital adequacy, non performing loans and return on assets consistent with international standards for classication of advances and prudential norms being applied in almost all areas.

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However, commercial banks being more focused on protability, tend to cherry pick and give comparatively less priority to marginal and sub-marginal farmers. The verdict on the 100 years old co-operatives is equally clear. Despite being the dominant purveyors of production and investment credit, their share has steadily declined over time. As on date, they face serious problems of governance, solvency and operational efciency. A large segment of the co-operative credit structure is multi-layered, under capitalised, overstaffed and under skilled, often with mounting non-performing assets coupled with erosion of public deposits in certain cases. As regards RRBs, barring a few, most have turned around but are often characterised as investment rather than credit institutions and are perceived to have deviated from the mandate of serving the poor and disadvantaged. Overall, the concerns in relation to rural credit other than relating to structural issues are generally expressed in terms of: . inadequacy of credit; . constraints on timely availability of credit; . high interest rates; . neglect of small and marginal farmers; . low credit-deposit ratios in several states; and . continued presence of informal markets. There is no gainsaying the fact that the formal institutional structure needs revamping to improve the efciency of the credit-delivery system in rural areas. In case of co-operatives, the Vaidyanathan Committee has concluded that having regard to its outreach and potential, recapitalisation could be undertaken so that the credit channels for agricultural credit which are presently choked could be declogged. The Vaidyanathan Committee has, however, made it clear that recapitalisation should only be considered if it is preceded by legal and institutional reforms by state governments aimed at making co-operatives democratic and vibrant institutions run according to sound business practices, governance standards and regulated at the upper tiers by the Reserve Bank of India (RBI). The recommendations of the Vaidyanathan Committee have been accepted by the GoI and are in the process of receiving the approval of states. The long term structure is under similar examination by Vaidyanathan Committee II. In so far as commercial banks are concerned, competition and search for higher returns is driving these banks to look for protable avenues and activities for lending such as nancing of contract farming, extending credit to the value chain, nancing traders and other intermediaries, etc. Simultaneously, there is witness of the emergence of institutional systems and products such as futures markets, weather and crop insurance designed to minimise the risk of lending. The direction is clear that commercial bank lending will be to clientele which can bear the load of commercial considerations. The coverage of excluded sections of the population by them is currently being supported under government sponsored schemes and targets for weaker sections targets within the priority sector. The efcacy of this, if measured by the yardstick of collections, is poor. Merging and revamping of RRBs that are predominantly located in tribal/backward regions is seen as a potentially signicant institutional

arrangement for nancing the excluded. Such an exercise is currently on and the state governments and sponsor banks have to come together and cooperate in this area. External factors and rural credit problem There are two sets of external factors which have a direct bearing on and adversely affect rural lending operations of banks. One category consists of political interference, bureaucratic dominance and dictates, and vested interests in rural areas. The second category of external factors is lack of rural infrastructure, lack of co-ordination between bank and bank on the one hand and between banks and government district level development departments on the other, lack of up-to-date land records and other related requirements, etc. The present report under review is full of statements bringing out how these factors are the cause of inefcient working of rural credit institutions. We have been complaining of political pressures since a long time, particularly when state participation in share capital of co-operatives recommended in 1954 by RCS Committee became undue state interference in actual implementation. The report under review is full of such complaints. The change in the governmental ethos and mood resulted in excessive state interference in the co-operative irrespective of the political persuasions of the party in power, in the last two decades it has been a story of collective supersessions of co-operatives at all levels and in place of democratically-elected management, government ofcials, or non-ofcials nominated by the government manning them the lower grade ofcials, the lower level co-operatives and the more senior level ofcials the higher tiers of co-operatives. The politicalisation of co-operatives in the last few decades has caused much damage to the system. Politicalisation has not conned itself to management area, it extends to the conduct of business also. One clear example of this in the co-operatives is the general write-off of co-operative dues resorted to by state governments. To rectify the situation, the committee has suggested as follows: . Governments must forthwith withdraw their intervention and interference. Nominated functionaries presiding over the SCBs and other co-operative institutions should be withdrawn and the elections of the ofce-bearers and the managing committees should be held promptly. Changes in the co-operative law should be introduced which will make it impossible for protracted supersession and take-over of the co-operatives. . The powers of the government in regard to organizational matters of co-operatives should be vested with the higher co-operative organisation. While all that is suggested above has to be implemented without further delay, this alone however is not enough to create conducive environment for promoting autonomous and healthy credit institutions and sound-lending operations. In the forceful plea of the committee: there is an imperative need for a strong political will and a general consensus among various political parties to give up misuse of the agricultural credit system as a means for achieving political ends, restore the sanctity of credit institutions and allow them to function as autonomous banking institutions. Unless and until this is done and well in time, the prospects of the growth of agricultural lending institutions on sound lines seems quite dim and any amount of effort by the credit agencies to improve the quality of lending and improve recovery of loans may not be of much avail. With the need for district development plan as the base for the district credit plan and with more and more plan programmes becoming more and more credit-based, the role

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of government ofcials has become signicant. The gaps in their role and excessive importance attached to the attainment of targets which the government ofcials x have created problems for bank lending. As the committee puts it:
[. . .] the excessive concern with target achievement has resulted in marginalising the function of branch managers. They have been reduced to the position of mere instruments to carry out the instructions of government functionaries at the local level and are obliged to lend even if the usual norms of lending and reasonably sound banking practices are to be over-looked, if not altogether ignored.

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Though the committee has pointed out the bad effect of obsession of government functionaries with targets on the quality of lending, it has not sufciently stressed the need for proper training of government ofcials in development lending in an interface programme with bank ofcials so that they begin to appreciate the necessity of adhering to norms of sound lending, recovery of loans and problems of rural credit institutions in this regard. As mentioned earlier, a large number of PACs and branches of commercial banks and rural banks do not have proper premises which can bet a banking institution, do not have godowns and do not have minimum living facilities for their staff at their rural branch centres. Besides banking infrastructure, lack of other supporting infrastructure such as extension services, marketing arrangements, etc. is equally responsible for the poor performance of rural credit institutions. Among others, the committee has recommended that: . Each state should establish a multi-disciplinary organisation to attend to fairly long-term planning for agricultural development, formulation of area-specic schemes, development of backward and forward linkages and building up of necessary infrastructure facilities needed by the agricultural sector. . Reiterating the suggestion of CRAFICARD for the creation of Primary Co-operative Development Fund by SCBs/DCCBs, the report says that such fund should be created without delay and regular annual contributions should be made to this fund so that PACs could be assisted for erection of modern counters, purchase of safe, etc. We should only wish that the central and state governments implement these suggestions promptly. Reviewing such a comprehensive report of an expert group, running into 1,074 pages and studded with a large quantum of eld-level ndings and statistical statements and covering every aspect of the rural credit system, is a difcult task. An attempt has been made in this review to critically examine the recommendations of the committee on those issues which, in the opinion of the reviewer, are crucial for the development of sound and forward-looking rural credit system. It is hoped that the reader gets a birds eye view of the stupendous work which the Reserve Banks Agricultural Credit Review Committee has accomplished with distinction. Our problem has always been and continues to be in converting good intentions and recommendations into time-bound operational programmes and their sincere implementation. Strategies adopted by RBI to increase the ow of credit Having realised the importances and potential of rural credit in development of the rural India, RBI has formulated certain strategies to increase the efciency of rural credit. Some of the strategies adopted by RBI to increase the ow of rural credit are summarized below.

First, the coverage of rural credit is extended to include facilities such as storage as well as credit through NBFCs. Second, procedural and transactional bottlenecks are sought to be removed, including elimination of service area approach, reducing margins, redening overdues to coincide with crop-cycles, new debt restructuring policies, one-time settlement and relief measures for farmers indebted to non-institutional lenders. Third, Kisan Card Scheme is being improved and widened in its coverage while some banks are popularizing general credit cards which is in the nature of clean overdraft for multipurpose use, including consumption. Fourth, public and private sector banks are being encouraged to enhance credit delivery while strengthening disincentives for shortfall in priority-sector lending. Fifth, the banks are urged to price the credit to farmers based on actual assessment of individual risk rather than on a at rate depending on category of borrower or end-use while ensuring that interest rates charged are justiable as well as reasonable. In brief, the thrust is on enhancing credit delivery in a regime of reasonable credit-prices within the existing legal and institutional constraints and to this limited extent there has been a major change in the mindset. Role of agricultural co-operatives and central co-operative banks in enhancing the credit facility Agricultural co-operatives in India are very actively and intimately involved in several agriculture-related activities. The most important activities are the disbursement of production credit and distribution of fertilisers and other inputs namely seeds, pesticides and agricultural implements. Agricultural co-operatives are also involved in procurement of farm produce, processing and marketing of oilseeds, Cotton, sugar, milk and milk products, distribution of essential commodities, clothes, kerosene oil and merchandise, etc. Coop. movement in India started way back in 1905. Till 1939, Agricultural co-operatives in India were distributing only the credit to the farmers. Its activities got diversied to consumer articles and also some agricultural inputs in the rural areas over a period of time. Subsequently, based on the suggestions made by different committees and commissions, the co-operatives were given a signicant role in distribution of fertilisers. Currently, co-operatives are playing a signicant role both in production and marketing of fertilisers. Co-operatives play a very important role in disbursement of agricultural credit. Credit is needed both by the distribution channel as well as by the farmers. The distribution channel needs it to nance the fertiliser business and farmers need it for meeting various needs for agricultural production including purchasing fertilisers. The credit needed by the farmers for purchase of fertilisers and other inputs is called short term credit or production credit whereas credit needed by the distribution channel is called distribution credit. Co-operatives also play a very important role in disbursement of medium term and long term credit needed by the farmers for purchasing agricultural equipments namely tractors, installation of tubewells and land development works, etc. In India, 78 per cent of the farmers belong to the category of small and marginal farmers. They depend heavily on credit for their agricultural operations. These farmers will not be able to adopt the modern agricultural practices unless they are supported by a system which ensures adequate and timely availability of credit on reasonable terms and conditions. Credit in India is made available to the farmers through a multi-agency

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network consisting of co-operatives, commercial banks and RRBs. However, co-operatives accounts for a large proportion of the agricultural credit made available to the farmers. National Bank for Agriculture and Rural Development (NABARD) was established in the year 1982 by an Act of Parliament and was entrusted will all matters concerning policy, planning and operation in the eld of credit for agriculture and other economic activities in the rural areas. Before that, this job was being done by RBI itself. NABARD works for progressive institutionalisation of the rural credit and ensures that the demands for credit from agriculture including the new and upcoming areas like oriculture, tissue culture, bio-fertilisers, sprinkler irrigation, drip irrigation, etc. are met. The medium and long term of loans are disbursed to the farmers through primary land development banks (757) who draw their nances from central land development banks (20) who in turn draw their nances from NABARD. As for the short term credit, this is disbursed to the farmers through primary agricultural credit societies (PACS-66,200) who draw their nances from central co-operative banks (363) who in turn draw their nances from the state co-operative banks (29). The state co-operative banks draw their nances from NABARD. Central co-operative banks are the federations of primary credit societies in a district and are of two types those having a membership of primary societies only and those having a membership of societies as well as individuals. The funds of the bank consist of share capital, deposits, loans and overdrafts from state co-operative banks and joint stocks. These banks provide nance to member societies within the limits of the borrowing capacity of societies. They also conduct all the business of a joint-stock bank. Central co-operative banks perform the basic banking functions of banking but they differ from commercial banks in the following respects: . Commercial banks are joint-stock companies under the companies act of 1956, or public sector bank under a separate act of a parliament whereas co-operative banks were established under the co-operative societys acts of different states. . Commercial bank structure is branch banking structure whereas co-operative banks have a three tier set-up, with state co-operative bank at apex level, central/district co-operative bank at district level, and primary co-operative societies at rural level. . Only some of the sections of banking regulation act of 1949 (fully applicable to commercial banks), are applicable to co-operative banks, resulting only in partial control by RBI of co-operative banks; and . Central co-operative banks function on the principle of cooperation and not entirely on commercial parameters. RRBs and its role in increasing facility of rural credit RRBs were established under the provision of an ordinance promulgated on 26 September 1975 and the RRB Act, 1976 mainly:
[. . .] with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural laborers, artisans and small entrepreneurs, and for matters connected therewith and incidental to.

RRBs are jointly owned by Government of India, the concerned state government and sponsor banks (27 scheduled commercial banks and one state co-operative bank);

the issued capital of a RRB is shared by the owners in the proportion of 50, 15 and 35 per cent, respectively. With the established of the rst RRB on 2 October 1975 there were as many as 196 RRBs as on 31 March 2005. Government of India initiated the process of structural consolidation of RRBs by amalgamating RRBs sponsored by the same bank within a state. The amalgamated RRBs are expected to provide need based and efcient customer services due to improved banking infrastructure, common publicity/marketing efforts, mechanization and computerization of branches, optimum utilization of available trained and experienced work force, etc. and also derive benets of a large area of operation (economy of scale), enhanced mobilization of nancial resources and deployment of credit and provision of more diverse banking activities. As a result of amalgamation process, the number of RRBs has been reduced from 196 as on 31 March 2005 to 133 as on 31 March 2006 and further to 96 as on 30 April 2007. Thus, under the amalgamation process, 145 RRBs have been amalgamated to form 45 new RRBs as on end April 2007 and remaining 51 are in the process of amalgamation. RRBs have now completed more than 33 years of operation. With the establishment of the rst RRB on 2 October 1975 within a period of 12 years ended 1987 the number of RRBs grew to 196, despite the suggestion of the working group on rural banks appointed in July 1975 that initially ve such banks should be set-up in selected areas to serve as pilot institutions so as to provide guidelines in respect of size of operations, initial coverage, viability, etc. for future development. By 1994-1995 many, if not most, RRBs experienced plethora of pernicious problems of human resource management, conict of interest among stake holders more importantly between state governments and sponsor banks, low recovery, building non-performing assets, incurring nancial loss, even erosion of capital directly affecting their operational viability leave alone nancial sustainability. When, through early 1990s, the reform process was initiated in the banking sector, RRBs were taken up for a close look. The Government of India in consultation with RBI and NABARD started the reform process through a comprehensive package for RRBs including cleansing their balance sheets and recapitalising them. Extant lending restrictions were removed and space and variety available for investment of their surplus funds was expanded. Simultaneously, a number of human resource development and Organizational Development Initiatives (ODI) were taken up by NABARD with funding support of the Swiss Development Corporation and with the tools of training and exposure visits, ODI, technology support, computerization and use of IT, system development, etc. for business development and productivity improvement. By end of March 2000, when RRBs completed 25 years of operations a good number of RRBs showed a remarkable improvement in their business operations and nancial performance as compared to the position of prevailing in 1994-1995. Since RRBs have signicant role and responsibility in the context of the emerging need for nancial inclusion and expanding outreach of micro-credit in rural areas, this paper attempts to critically evaluate the performance of RRBs at the end of 25 years ended March 2001 and during 2005-2007 when the process of amalgamation of RRBs commenced as recommended by the Vyas Committee in 2004. Micro nance a tool of rural credit Several commercial MFIs have made inroads in addressing the constraints to rural micronance over the last several years. Their achievements in developing demand-driven

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products and services, and using cost-effective deliver mechanisms and technologies are highlighted below. Rural group lending In the absence of adequate risk mitigation instruments (e.g. collateral, insurance, futures, etc.) commercial MFIs are forced either to avoid rural areas or to design contracts that indirectly resolve the problems. Use of joint liability contracts or group credit is one popular indirect alternative. Group lending has been successful in settings where regular meetings provide signicant ancillary benets, where a high degree of social cohesion exists, and when the loan size is still within the mutual insurance capacity of the group. Nevertheless, in some cases group lending imposes high transaction costs on its members, such as their time involved in identifying members, group formation, as well as attending group meetings and any mandatory training. Rural individual lending Various MFIs offer individual loan products and have even attracted signicant farm-based and agriculture-related microenterprises households. The main reasons clients use such nancial services are the low barriers to entry, including a minimum savings deposit balance. MFIs have instituted an innovative small-holder agricultural loan product, which is based on projected levels of agricultural production, has a exible repayment schedule and takes into account off-farm income. SHG-bank linkage The SHG-bank linkage model of NABARD is an outstanding example of an innovation leveraging on community based structures and existing banking institutions. The SHG-bank linkage was conceived at a time when the nancial sector reforms were motivating policy planners to search for innovative products and strategies for delivering nancial services to the poor in a sustainable manner consistent with high repayment rates. The search for these alternatives started with internal introspection regarding the innovations which the poor had been traditionally making, to meet their nancial services needs. It was found that the poor tend to come together in a variety of informal ways for pooling their savings and dispensing small and unsecured loans at varying costs to group members on the basis of need. The essential contribution of NABARD in the SHG-bank programme was to recognize this process, which had been catalysed by non governmental organisations (NGOs), and to create an interface of these informal arrangements of the poor with the banking system. The SHG-Bank Linkage Programme started as an Action Research Project in 1989. Positive eld-level ndings led, in 1992, to the setting up of a Pilot Project. The project was designed as a partnership model between three agencies, namely, the SHGs, banks and NGOs: (1) SHGs were to facilitate collective decision-making by the poor and provide doorstep banking; (2) banks as wholesalers of credit, were to provide the resources; and (3) NGOs were to act as agencies to organise the poor, build their capacities and facilitate the process of empowering them.

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Future challenges Inspite of the several steps taken up by RBI and various other related institutions, there are still various challenges that are prevalent in providing rural credit to the rural people of India. Some of them are discussed below. First, there is a need for legal and institutional changes relating to governance, regulation and functioning of rural co-operative structure and regional rural banks who have to be critical instruments for rural credit in future. In this regard, it is useful to note the nature of competition and accountability to shareholders governing the functioning of commercial banks which would make their foray into rural credit predominantly subject to commercial considerations. The changes warranted in co-operatives as well as RRBs involve deep commitment of state governments and have signicant bearing on political economy. Thus, the current thrust to improve credit delivery may soon face limits unless the legal and institutional changes are agreed upon and acted upon in good faith in a timely fashion. It is the fervent hope of RBI that a consensus will develop soon on these fundamental changes that are essential for achieving the broad policy objectives. Second, there are overhang problems of non-performing loans and erosion of deposits in both co-operatives and RRBs. There is some assessment of magnitudes of losses and capital needs in RRBs while in the case of co-operatives the data are not yet rm. It may not be appropriate to continue to permit institutions that are not solvent to seek and accept public deposits and hence RBI favours early restructuring and recapitalisation. There is an inevitable scal impact of any scheme of recapitalisation which has to be transparent and has to bear all the costs of overhang issues as well as capital adequacy to assure continued solvency and safety of public deposits in future. Such a one-time scal support is justiable, urgent and essential for several reasons, including that there is no alternative and delayed response could end up being more expensive. The current acceleration in credit delivery can be sustained in the medium term, if such scal support from states and centre is rmly put in place soon to revive or reorganize rural co-operative structure and RRBs. Third, there is a need to foster credit culture to make enhanced rural credit a lasting phenomenon. A benign credit culture is one which encourages appropriate credit price, credit delivery under transparent conditions of lenders as well as borrowers liabilities and incentives for repayment rather than default. Measures that counter such a benign credit culture are often well-intended, but as the experience so far has shown they tend to be seriously counter productive. There is a need for a consensus in this regard, so that, rural credit system in India is compatible with our goals of higher growth and better equity. In this regard, it is necessary to recognize that expansion of credit in some of the states which have low credit-deposit ratio depends on conducive credit culture capturing factors relating to governance and commercial viability. Fourth, on the critical issue of risk mitigation, it is held that experiments with crop or credit-insurance in India have not been very satisfactory so far. In fact, many farmers argue that where compulsory insurance is resorted to, it increases the burden of borrowing from institutional sources and once the transaction costs are added, the overall costs exceed the prime lending rates signicantly. There are several risks that a farmer faces, and of these future price and monsoon conditions are most severe and almost entirely beyond the control of the farmer. While minimum support price is a mechanism that has served us well, its cost-effectiveness is subject to debate

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and in any case the coverage is limited to cereals like rice and wheat and in some areas cotton. The farmer faces the risks of monsoon conditions and usually the adverse climatic conditions are widespread in a geographical area, with the result severe limits are set on private-insurance. Professor C.H. Hanumantha Rao agged the issue of strategy to reduce risks as one of the four major areas of long-term planning (in 1993) but they covered only water conservation, venture capital and insurance promotion, where viable. Perhaps, it is necessary to recognize that if some elements of insurance are abinitio not viable, extending credit becomes more risky and hence constrained. Finally, in the light of the above, there is merit in considering a comprehensive public policy on risk management in agriculture, as not only a means of relief for distressed farmers but as an ingredient for more efcient commercialized agriculture. The components of such a policy have to be worked out in detail, but illustratively, the public policy could consider some of the elements described here. First, establishing a well articulated, objective and independent assessment of impact of adverse monsoon conditions and appropriate relief to farmers on an assured basis. Second, facilitating farmers to assure themselves of a price for all their products before harvesting, or even sowing the seed, through a well regulated network of forward, futures and options markets. Third, establishing and implementing liability of suppliers for any shortfall in quality or assured supply in vital inputs such as seeds, pesticides, power and water. Fourth, gradually eliminating and replacing price-subsidies with outlays on risk mitigation for farmers in the broadest sense. Fifth, positioning exibility in extending rural credit within a broad framework of such a comprehensive public policy on risk management in agriculture. Conclusion Attempts to strengthen Indian agriculture must address not only farm production (farmers) but also processing, marketing, trade and distribution. We must link farmers to markets. In this endeavor, marketing and rural credit systems are extremely important. Indian agricultural marketing and rural credit systems have undergone several changes during the last decade. However, in the emerging environment, these need many more changes for making the agricultural sector vibrant and responsive to the aspirations of the rural masses. The suggested agenda for reforms includes: . revision in the state APMR legislation; . redening the role of state marketing boards and market committees; . repeal of ECA except under emergencies; . putting in place a unied food law; . introduction of new instruments like contract farming and warehouse receipt system; and . assurance to investors that regulations will not be reimposed. The policy of price support needs to be rationalized and decentralized. CACP and support prices should be given statutory status. Complementary public investment

in marketing infrastructure should be made. The system of training farmers by strengthening the marketing extension education network needs to be put in place. Instruments for insurance of farmers against production and price risks should be made an essential component of development strategy. In the eld of credit delivery, the nancial institutions are under stress, particularly since the nancial sector reforms of 1992-1993. The credit policy should continue to emphasize small borrowers. Commercial banks are wary of lending to the agricultural sector and rural poor. The provisions of mandatory lending for the priority-sector and agricultural activities should continue. Banks should take the help of NGOs and local formal institutions in their lending programmes to reduce transaction costs. These apart, effective linkages between farmers and processors on the one hand and between processors and credit agencies on the other should be promoted. Interlocking of credit and product/input markets is crucial and should be recognized. To meet the credit needs of the poor, programmes like linking of self-help groups with lending agencies are important but in these linkages, the role of promoting institutions should not be lost sight of. Marketing and institutional credit systems have always remained critical for agricultural development. Their role has been enhanced in the liberalized economic environment. The set of reforms and strategic actions suggested in this paper will help these systems strengthen Indian agriculture. It has come a long way from the pilot stage of nancing 500 SHGs across the country. Of the total SHGs formed, more than 1.6 million have been linked with 35,294 bank branches of 560 banks in 563 districts across 30 states of the Indian Union. Cumulatively, they have so far accessed credit of Rs. 6.86 billion. About 24 million poor households, translating into nearly 120 million poor, of which around a third belong to the SC/ST category, have gained access to the formal banking system through the programme. Agricultural co-operatives in India are the backbone of the co-operative system and involved in variety of function and serving the rural masses by providing credit, fertilisers, seeds, agro-chemicals, agriculture implements, etc. Their role has been commendable and helped in making essential inputs availability to the rural masses. These need to be further strengthened. It has reduced the incidence of poverty through increase in income, helped the poor to build assets and thereby reduce their vulnerability. It has enabled households that have access to it to spend more on education than non-client households. Families participating in the programme have reported better school attendance and lower drop out rates. It has empowered women by enhancing their contribution to household income, increasing the value of their assets and generally by giving them better control over decisions that affect their lives. In certain areas, it has reduced child mortality, improved maternal health and the ability of the poor to combat disease through better nutrition, housing and health especially among women and children. Again, in certain areas, it has contributed to a reduced dependency on informal money lenders and other non-institutional sources. Finally, it has offered space for different stakeholders to innovate, learn and replicate. As a result, some NGOs have added micro-insurance products to their portfolios, a couple of federations have experimented with undertaking livelihood activities and grain banks have been successfully built into the SHG model in the eastern region. SHGs in some areas have employed local accountants for keeping their books; and IT applications are now being explored by almost all for better MIS, accounting and internal controls.

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Further reading Basu, P. and Srivastava, P. (2004), Scaling up access to nance for Indias rural poor, NCAER, New Delhi, mimeo. Basu, P. and Srivastava, P. (2005), Exploring possibilities: micronance and rural credit access for the poor in India, Economic and Political Weekly, Vol. 40 No. 17, pp. 1747-56. Bell, C. (1990), Interactions between institutional and informal credit agencies in rural India, World Bank Economic Review, Vol. 4 No. 3, pp. 297-327. CGAP (2000), Focus Note No. 18: Exploring Client Preferences in Micronance: Some Observations from SafeSave, The World Bank, Washington, DC. Coleman, B. (1999), The impact of group lending in North-East Thailand, Journal of Development Economics, Vol. 60, pp. 105-41. Deshpande, R. and Verma, N. (2003), Review of rural nance institutions in India, background paper prepared for the World Bank, The World Bank, Washington, DC. Fisher, T. and Sriram, M.S. (2002), Beyond Microcredit: Putting Development Back into Micronance, Vistar, New Delhi. Gupta, A.K. and Shroff, M. (1987), Rural credit: how do the poor see it?, Vikalpa, Vol. 12. Hulme, D. and Mosley, P. (1996), Finance Against Poverty, Routledge, London. Jain, P.S. (1996), Managing credit for the rural poor: lessons from the Grameen bank, World Development, Vol. 24 No. 1, pp. 79-89. Jean, D., Peter, L. and Naresh, S. (2004), Credit in Rural India: A Case Study, London School of Economics, London. Kamble, N.D. (1979), Rural Growth and Decline: A Case Study of Selected Village, Ashish Publishing House, New Delhi. Morduch, J. and Rutherford, S. (2003), Micronance: analytical issues for India, background paper prepared for the World Bank. Rajan, R. and Zingales, L. (2003), Saving Capitalism from the Capitalists: How Open Financial Markets Challenge the Establishment and Spread Prosperity to Rich and Poor Alike, Century, Post Falls, ID. RBI (1954), All-India Credit Survey, Reserve Bank of India, Mumbai. Reddy, Y.V. (1999), Future of rural banking, G Ram Reddy Third Endowment Lecture, Hyderabad, 4 December. Riddell, R. and Robinson, M. (1995), Non Governmental Organizations and Rural Poverty Alleviations, Oxford Publishing, Clarendon, TX. Robinson, M.S. (2001), The Micronance Revolution: Sustainable Finance for the Poor, The World Bank, Washington, DC. Ruthven, O. (2001), Money mosaics: nancial choice and strategy in a West Delhi squatter settlement, University of Manchester Institute for Development Policy and Management, Finance & Development Research Programme Paper 32. Seibel, H.D. (2001), SHG Banking: A Financial Technology for Reaching Marginal Areas and the Very Poor, University of Cologne, Cologne. Srivastava, P. and Shukla, R. (2004), Rural nancial access survey: summary ndings, paper presented at Workshop on Improving Rural Access, The World Bank, New Delhi, mimeo. Thorat, Y.S.P. (2008), Rural Credit in India: Issues and Challenges, NABARD Publication, Mumbai. (The) World Bank (2003a), Improving Access to Finance in Brazil, The World Bank, Washington, DC.

(The) World Bank (2003b), India: Development Policy Review: Sustaining Reform, Reducing Poverty, The World Bank, Washington, DC. (The) World Bank (2004), Micronance in India: Issues, Challenges and Policy Options, The World Bank, Washington, DC. About the author Sunildro L.S. Akoijam is currently an Assistant Professor in the area of Marketing and Strategy at the Department of Management, North-Eastern Hill University (NEHU), Tura Campus, Tura, Meghalaya (India). He is pursuing his doctoral degree in the area of brand management. He has presented research papers and case studies in various international and national seminars and conferences. He has also participated in various workshops, faculty development programmes, short term certicate courses and academic related activities organized by premier management institutes in different parts of the country. His research papers have been published in various refereed international and national journals. He is a member of esteemed management associations like All India Management Association (AIMA), Rural Marketing Association of India (RMAI), Delhi Management Association (DMA) and The Society for Management Education, Kurukshetra. Sunildro L.S. Akoijam can be contacted at: [email protected]

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