2. STUDENT DETAILS
Name: Ahana Sarkar
Stream: Post Graduate Diploma in Management (PGDM)
Semester: 2nd
Specializations: Marketing
Finance
Enrolment Number: 12015008012041
Year: 2015-2017
College: Institute of Engineering & Management, Saltlake
(Kolkata)
Faculty Guide: Ms. Anuradha Saha
3. ABSTRACT
The rural sector of a developing nation like India plays a key role in
determining the economic state of the nation. The problems faced by the rural
population finds a progression throughout the 20th century and beyond. There
has been a dependence on usurious moneylender, their malpractices and
therefore an exploitative market structure of the poor ruined their condition over
time. With the advent of commercial banks in the rural sector, the indirect and
direct finances from the banking institutions provided the necessary credit over
time to a large rural sector to help improve their financial condition by reducing
the role of moneylenders. The increase in agricultural GDP can be attributed to
the loans disbursed by these institutes along with Self-Help groups and Micro-
finance institutions.
4. INTRODUCTION
The role of rural credit in the context of Indian Economy constitutes a
vast participation of the Indian population as the majority lies in the rural
areas. Almost two-thirds of the Indian population reside in the rural areas of the
country and hence encapsulate the need to inject the necessary credit into the
system of rural financial structure. Now, we can formally assess the meaning of
rural credit before delving into the intricacies of the system of rural credit. Rural
credit can be defined as a kind of lending program or line of credit which is
aimed at impacting a rural population in some manner. There are banks and
cooperatives that specialize in extending this type of credit to farmers and
others engaged in the agricultural task. Depending on the nature of the
organization, credit plans may focus on providing mortgage assistance, securing
new equipment, or even funds to support research into various aspects of land
development within a rural community.
The overview of rural credit in India begins in the late 19th century but we
are primarily concerned with the major episodes of the 20th century. The
narrative speaks of the impact of rural credit on the productivity and the net
effect of change on the Indian economy. The problems faced by the rural sector
of the country display a definite flow in the period we are dealing with. There
used to exist a huge dependence pattern on moneylenders who used to charge
exorbitant interest rates on the money that they lent to the poor rural members
of the population in need to money to sustain their life. Apart from them the
existence of a hugely exploitative grid of interlocked, imperfect markets exploited
the poor immensely. The performance of the cooperative institutions of India
cannot be highly spoken of till the nationalisation of banks came into effect in
1969 which in fact had a positive impact on rural credit and economic
development of the country. But, the system had its own negativity attached to
it as well which forced the economy to go into economic reforms two decades
later. The reforms did increase the profitability of the bank but had pretty
adverse effects in the backward regions of the country as the affordability of
rural credit became an issue and the moneylenders made a comeback into the
frame to take the advantage.
The money lending practices at such high interest rates have been very
well documented in many official reports from the colonial period. All the
documents that have been reported have their own importance but a few of
them stands out. Central Banking Enquiry Committee (CBEC) report (1929) and
it’s associated Provincial reports, of which the Madras Provincial Banking
5. Enquiry Committee (MPBEC) report is regarded as a classic. It explains how the
mechanisms of debt typically had a cumulative force:
"Frequently the debt is not repaid in full and a part of the loan persists
and becomes a pro-note debt. In the course of time, it may with a lucky
year be paid off or it may become a mortgage debt. By the existence of
this heavy persisting debt, the creditor takes the bulk of the produce and
leaves the ryot unable to repay short-term loans. But equally, the short-
term loan has produced long-term debt and there is a vicious circle. The
ryot cannot clear his short-term debt because of the mortgage creditor
and he cannot cultivate without borrowing because his crop goes largely
to the long-term creditor. If he pays his long-term creditor his current
debts swell and overwhelm him.”
(MPBEC Report, 1930, Vol. I, p.77)
As a result, the repayment of loans was a compulsion for the farmers in order
to sell their crop and the creditor usually insisted a repayment in the immediate
post-harvest period. This forced the debtor to borrow once again. In 1929, the
MPBEC found that the single major motivation that drove the farmers to
continuously stay in the debt-payment cycle was the repayment of the “prior
debts”. One of the most important sources of credit were rich landowners for
whom the mortgage mechanism was an ideal mean to get control over large
tracts of land through the vicious cycle of debts.
This system increasingly made life difficult for the farmers as it was
vulnerable to cheating in quite a few areas. In 1935, Report on Agricultural
Indebtedness provided instances of moneylenders who kept account but never
revealed them to debtors, to whom they never provided receipts either. They
recorded higher rate of interest on the pro notes than they actually charged. The
amount repaid was generally not deducted while calculating future interest
dues, nor were the principal and interest separately accounted. If repayment
was not made in instalments previously agreed to, a higher ‘penal’ interest was
charged. Another oppressive nexus involved the purchaser of crops who in
several cases was also a moneylender. In such cases, the debtor had to sell his
produce at a pre-arranged time, usually immediately after the post harvest
period and at a price lowered to take account of the interest on the loan. Such
producers who lacked the requisite storage and transport facilities to take
advantage of price variations, both inter-spatial and inter-temporal were forced
to sell off the ground, as it were, immediately after the harvest. Finally, the fact
that they had to buy back grain in the peak priced period made them even more
inextricably trapped in debt for they had to borrow in order to buy.
6. After the 1915 Maclagan Committee on Cooperation, provincial cooperative
banks were established in almost all major provinces by 1930. But unlike
Europe, cooperatives in India found it very hard to get going. In the Indian
system, the socio-economic divisions in rural India appeared to overwhelm the
very idea of “cooperation”. The cooperative credit societies were “run in most
cases by rich landlords and moneylenders”. These societies were embroiled in
local power politics and were a source of rural patronage and influence.
The Usurious Loans Act, passed in 1918, sought to apply the damdupat
principle (interest never exceeding principal) to debts. The CBEC estimated in
1929 that the accumulated burden of inherited rural indebtedness in India was
Rs.900 crores. The steep fall in agricultural prices during the Great Depression
opened the floodgates of legal suits for attachment of lands of borrowers. The
official response was a spate of Debt Conciliation Acts between 1933 and 1936
by the governments of CP and Berar, Punjab, Assam, Bengal and Madras. But
in his classic enquiry into rural indebtedness in 1941, BV Narayanswami Naidu
concluded, "after existing for about seven years, the Debt Conciliation Boards
were abolished as not having been of any considerable practical utility" (Naidu,
1946, p.52). The complicated administrative machinery involved in these Boards
and the fact that they had no coercive powers explains their poor performance.
The Punjab Regulation of Accounts Act (1930) and the Debtors Protection Acts
of 1935 provided for compulsory licensing and registration of moneylenders and
proper recording of transactions and accounts.
It is clear that the strength of the debt-mechanisms remained largely
unimpaired by the activities of the colonial state. This is why the statement by
one of colonial Punjab's legendary administrator-scholars Malcolm Darling
(1925) that “the Indian peasant is born in debt, lives in debt and dies in debt” has
become a classic of Indian economic history. This condition resulted from an
interlocking of a number of imperfect markets (land, input, output, labour and
land-lease markets) with the credit market, which itself was characterised by
deep imperfections. The balance of power was terribly skewed against the
poorer, "lower" caste farmers, who faced a cumulative and cascading spiral of
expropriation. In such a situation, productive investments were virtually
impossible to visualise for the vast majority of India's peasants. Worse, even
basic consumption needs were hard to meet, with an external ecological crisis
such as a drought, being enough to tilt the balance and endanger survival itself.
ROLE OF RESERVE BANK IN RURAL CREDIT
FACILITATION
Reserve Bank of India is perhaps the most important factor in the credit
distribution facility in the country. It has historical allocated a key priority to
the agricultural credit delivery. The Reserve Bank of India Act, 1934 envisaged a
special developmental role for the Reserve Bank in the sphere of agricultural
7. credit with responsibility, in particular, for financing seasonal operations and
the marketing of crops. The Rural Banking Enquiry Committee (Thakurdas
Committee, 1950) stressed the importance, for an efficient system of agricultural
finance, of a sound co-operative credit structure capable of developing close
relations with the Bank. The Reserve Bank followed up the Rural Banking
Enquiry Committee with the informal conference. Following the conference’s
recommendation, the Reserve Bank decided to organise a Rural Credit Survey
and constitute a Standing Advisory Committee on Agricultural Credit.
The Reserve Bank prepared a draft-bill, approved by the Board in
February, 1955, which among other things, authorised it to make long-term
loans to State Governments to subscribe to the share capital of co-operative
institutions and to central land mortgage banks, and set up the proposed
special funds. The bill also provided for a third Deputy Governor to have
exclusive responsibility of rural credit. The bill was passed into law on May 8,
1955. The National Agricultural Credit (Long-term operations) Fund was created
in 1955 and the Reserve Bank was authorised to specify from time to time, the
purposes for which, it would make medium-term loans. Over the years such
loans were made to finance a wide range of investments relating to the rural
sector.
In 1960, the Committee on Co-operative Credit (Vaikunth Lal Mehta
Committee) advised examining the possibility of using P. L.480 funds to finance
long-term productive investment in agriculture. Consequently, the Reserve Bank
and the Government began to think to create a specialised agency to finance
agricultural investment. It was thought that the demand for agricultural credit
might require the establishment of some specialised institutions, which would
ultimately relieve the Reserve Bank of its function so far as rural finance and
agricultural credit was concerned. The Agricultural Refinance Corporation Bill,
1962 received the President’s assent in March 1963. The Corporation under the
chairmanship of D. G. Karve, the then Deputy Governor, started its operation in
Bombay on July 1, 1963. The Corporation took up a wide range of activities of
the rural sector for refinance / direct loans / subscriptions to fully guaranteed
debentures of eligible institutions covering central land mortgage banks, State
cooperative banks, scheduled commercial banks (share holders of the
corporatives), and co-operative societies under the approval of the Reserve
Bank.
In July 1966, the All India Rural Credit Review Committee (Venkatappiah
Committee) was formed to review the progress made in the supply of credit for
intensive agricultural production and marketing from all the institutional
sources including commercial banks, working of the crop loans system,
progress of rural branches of commercial banks and coordination between
different agencies involved in rural credit. The Committee submitted its report in
July 1969 and admitted that co-operatives would have to be strengthened but it
had no hesitation in highlighting that they should be all the better, and the
farmer would be better served, if other institutions coexisted with them in
healthy competition. In other words, the adoption of the multi-agency approach
as the most feasible and appropriate response to the credit requirements of
agriculture and allied activities was recommended. The adoption of ‘social
control’ as a policy measure in 1968 helped the Reserve Bank to motivate the
commercial banks into the area of agriculture and rural credit on a significant
8. scale. The National Credit Council, constituted in December 1967 recognised
the importance of the commercial banks’ role as complementary to co-operative
initiatives.
CHANGE IN ORIENTATION OF BANKING SYSTEM
As many as fourteen commercial banks were nationalised in July 1969
and helped the orientation of commercial banks lending policies and procedures
to meet the requirements of the priority sectors of the economy with due to
attention to the financing needs of the small farmers. The multi-agency
approach covered the Lead Bank Scheme, which provided, boost to the
improved flow of funds to agriculture sector through the organised credit
channels. Agriculture sector got the place of importance in the priority sector
lending. Realistic targets for deposits for central cooperative banks were
attempted. The borrowing needs, consequently from the Reserve Bank were met
at differential rates of interest (concessional rate usually being a few basis
points below the Bank rate). By mid- 1977, the scheme of financing primary
agricultural credit societies was in operation in 12 States, 24 commercial banks
through 604 branches had taken over 343 societies for financing, however, over
the years, it was found that the experience with the working of the scheme was
in general not satisfactory.
In the context of the large finance gap, the commercial banks, Regional
Rural Banks (RRBs) and co-operatives were deeply concerned during late 1970s.
The system of district credit plans was introduced to meet the credit needs by
different agencies. The commercial banks were geared up to fulfil priority sector
targets and the target was raised to 40 per cent of their outstanding advances
by March 1985. Another target was the attainment of 60 per cent of credit
deposit ratio by the banks by March 1985 in respect of rural - semi urban
branches separately. The Reserve Bank of India appointed a Committee to
Review Arrangements for Institutional Credit for Agriculture and Rural
Development, chaired by B. Sivaram, former Secretary of the Ministry of
Agriculture, Government of India in 1979. The report was submitted in 1981
and recommended the setting up of a National Bank for Agriculture and Rural
Development (NABARD). The NABARD came into existence in July 1982. All
major rural credit related works from the Reserve Bank of India were shifted to
the NABARD. Works relating to the urban-cooperative banks remained with the
Reserve Bank. A new Department as Rural Planning and Credit Department
(RPCD) was set-up in the Reserve Bank, to look into the broad rural credit
policies of the Reserve Bank as a part of overall monetary management of the
economy for price stability with sustainable growth of the economy. The Reserve
Bank so, far devoted its attention to provide necessary credit to rural sector for
boosting agricultural growth directly and indirectly through many institutions.
It might be indicated that the Reserve Bank of India provided short-term and
medium-term loans to State co-operative banks, for agricultural production and
marketing activities. Medium-term loans were provided out of the National
Agricultural Credit (LTO) Fund. Long-term finance was provided to the State
Governments and Land Development Banks through LTO Fund for contribution
9. to the share capital of cooperative societies and to rural debentures of Land
Development Banks (LDBs). Reserve Bank also contributed to the ordinary
debentures of LDBs by way of general funds. Besides, the Reserve Bank
contributed to the resources of agriculture refinance corporations.
LITERATURE REVIEW
India pursued a system of supply leading approach to increase credit in
the agricultural sector. The objectives have been to replace moneylenders,
relieve farmers of their debts and to achieve higher levels of agricultural credit,
investment and agricultural output. Among earlier studies, Binswanger and
Khandker (1992) found that the output and employment effect of expanded
rural finance has been much smaller than in the nonfarm sector. The effect on
crop output is not large, despite the fact that credit to agriculture has strongly
increased fertilizer use and private investment in machines and livestock. High
impact on inputs and modest impact on output clearly mean that the additional
capital investment has been more important in substituting for agricultural
labour than in increasing crop output.
In the time period between bank nationalization in 1969 and the onset of
financial liberalization in 1990, bank branches were opened in over 30,000 rural
locations which had no prior presence of commercial banks. Alongside, the
share of bank credit and savings which was accounted for by rural branches
raised from 1.5 and 3 percent respectively to 15 percent each (Burgess and
Pande, 2005). This branch expansion was an integral part of India’s social
banking experiment which sought to improve the access of the rural poor to
cheap formal credit. The estimates suggested that a one percent increase in the
number of rural banked locations reduced rural poverty by roughly 0.4 percent
and increased total output by 0.30 percent. The output effects are solely
accounted for by increases in non-agricultural output – a finding which
suggests that increased financial intermediation in rural India aided output and
employment diversifi cation out of agriculture.
In a detailed paper, Mohan (2006) examined the overall growth of
agriculture and the role of institutional credit. Agreeing that the overall supply
of credit to agriculture as a percentage of total disbursal of credit is going down,
he argued that this should not be a cause for worry as the share of formal credit
as a part of the agricultural GDP is growing. This establishes that while credit is
increasing, it has not really made an impact on value of output figures which
points out the limitations of credit. In another study, Golait (2007) attempted to
analyse the issues in agricultural credit in India. The analysis revealed that the
credit delivery to the agriculture sector continues to be inadequate. It appeared
that the banking system is still hesitant on various grounds to purvey credit to
small and marginal farmers. It was suggested that concerted efforts were
required to augment the flow of credit to agriculture, alongside exploring new
innovations in product design and methods of delivery, through better use of
technology and related processes. Facilitating credit through processors, input
10. dealers, NGOs, etc., that were vertically integrated with the farmers, including
through contract farming, for providing them critical inputs or processing their
produce, could increase the credit flow to agriculture significantly.
In general, it is difficult to establish a causal relationship between
agriculture credit and production due to the existence of critical endogeneity
problem. However, Sreeram (2007) concluded that increased supply and
administered pricing of credit help in the increase in agricultural productivity
and the well being of agriculturists as credit is a sub-component of the total
investments made in agriculture. Borrowings could in fact be from multiple
sources in the formal and informal space. Borrowing from formal sources is a
part of this sub-component. With data being available largely from the formal
sources of credit disbursal and indications that the formal credit as a proportion
of total indebtedness is going down, it becomes much more difficult to establish
the causality. He also stated that the diversity in cropping patterns, holding
sizes, productivity, regional variations make it difficult to establish such a
causality for agriculture or rural sector as a whole, even if one had data. Finally,
he argued that mere increase in supply of credit is not going to address the
problem of productivity, unless it is accompanied by investments in other
support services. In the present study, we take a re-look at the problem by
quantitatively assessing the impact of institutional credit expansion on
agriculture.
QUANTITATIVE ANALYSIS OF RURAL CREDIT
Table 1: Break-up of Institutional and Non-Institutional Rural Credit
(Per cent)
1951 1961 1971 1981 1991 2002
Institutional Agencies 7.2 14.8 29.2 61.2 64.0 57.1
Government 3.3 5.3 6.7 4.0 5.7 2.3
Co-op. Society/bank 3.1 9.1 20.1 28.6 18.6 27.3
Commercial bank incl. RRBs 0.8 0.4 2.2 28.0 29.0 24.5
Insurance -- -- 0.1 0.3 0.5 0.3
Provident Fund -- -- 0.1 0.3 0.9 0.3
Others institutional agencies* -- -- -- -- 9.3 2.4
Non-Institutional Agencies 92.8 85.2 70.8 38.8 36.0 42.9
Landlord 1.5 0.9 8.6 4.0 4.0 1.0
Agricultural Moneylender 24.9 45.9 23.1 8.6 6.3 10.0
Professional Moneylender 44.8 14.9 13.8 8.3 9.4 19.6
Traders and Commission Agents 5.5 7.7 8.7 3.4 7.1 2.6
Relatives and Friends 14.2 6.8 13.8 9.0 6.7 7.1
Others 1.9 8.9 2.8 4.9 2.5 2.6
Total 100 100 100 100 100 100
*: includes financial corporation/institution, financial company and other institutional
agencies.
Note: Percentage share of different credit agencies to the outstanding cash dues of the
households as on 30th June. -- denotes not available.
Source: All India Rural Credit Survey (1954); All India Debt and Investment Survey,
Various Issues.
11. Decline of the Moneylender: Somethingfairly dramatic happened in the 20
years following bank nationalisation. The share of "exploitative" sources
(professional moneylenders, landlords and agriculturist moneylenders) in rural
credit fell from an average of over 75% in 1951-1961 to less than 25% in 1991.
Also more importantly, the dependence on commercial banks including
the regional rural banks went from 0.4 per cent in 1961 to 29 per cent in 1991.
There had been progress on this front which quantitatively proves the rural
credit distribution by the banks.
The expansion of institutional credit facilities since 1950-51 has
challenged the monopoly position of the village moneylender. Progressive
institutionalisation of credit has played a pivotal role in creating a scenario such
that private sources now meet barely 20 per cent of the short and medium-term
credit needs of the farmers. In other words, institutional sources meet 80 per
cent of the rural credit needs.
ROLE OF RURAL CREDIT IN DEVELOPMENT
K.N. Raj in 1965 made a strong statement regarding the process of
nationalisation of commercial banks, in which he said “there are important
reasons why banking enterprises seeking to maximise their profits would not
venture out into areas and sectors of activity to which high priority needs to be
attached from a larger social and economic point of view.” Rural credit was not a
commodity that poor people required only to gain freedom from usurious
moneylenders but it is to be seen as a public good critical to the development of
a backward economy like India. The private banks which existed during that
phase would operate in imperfect credit market which would only aggravate the
imperfections. Keynes and Kalecki had already provided the theoretical
foundations of this view in 1930s. As Kalecki put it, "the most important
prerequisite for becoming an entrepreneur is the ownership of capital . . . firms
below a certain size have no access whatever to the capital market . . . a state of
business democracy where anybody endowed with entrepreneurial ability can
obtain capital for starting a business venture is, to put it mildly, unrealistic.”
In the General Theory, Keynes expresses the problem a little differently. He
distinguishes "two types of risk that affects the volume of investment" (Keynes,
1935, p.144). The borrower's risk arises because she is unsure whether her
business venture will provide the expected yield. She would want a low rate of
interest, especiallyif her venture is a risky one. But the same situa tion creates the
"lender's risk" of default by the borrower (voluntary, what Keynes terms "moral
hazard" or involuntary, due to poor returns on investment). This necessitates that
the lender charges a rate of interest high enough to induce him to lend.
12. Table 2: Average GDP growth rates of agriculture and other sectors
at 1999-2000 prices
(Per cent)
Period
Total
Economy
Agriculture
& allied
Crops &
livestock
Non-
agriculture
1 2 3 4 5 6
Pre-Green
Revolution
1951-
52 to
1967-
68
3.7 2.5 2.7 4.9
Green
Revolution
period
1968-
69 to
1980-
81
3.5 2.4 2.7 4.4
Wider
technology
dissemination
period
1981-
82-
1990-
91
5.4 3.5 3.7 6.4
Early Reform
Period
1991-
92 to
1996-
97
5.7 3.7 3.7 6.6
Ninth and Tenth
1997-
98 to
2006-
07
6.6 2.5 2.5 7.9
Plan
2005-
06 to
2006-
07
9.5 4.8 5.0 10.7
Source: Economic Survey (2007-08).
Also because profitability of banks is greater, the higher "the proportion of
their earning assets to the idle cash reserves they have to hold" (ibid, p.309),
servicing illiterate customers, who insist on payments in cash on the spot,
means higher idle cash reserves of banks and lower profitability.
Nationalisation of large banks was the only forward. KN Raj was aware
that "the bureaucratic element in decision making may introduce considerable
rigidity" but he hastened to add that in "large private banks the element of
impersonality, with all the rigidity it introduces, is almost as great as in the case
of State-owned banks, except in case of favoured customers known to the bank.
The larger private banks are no less impervious to the needs of small customers
who have no security to offer."
13. Data Source: HANDBOOK OF STATISTICS ON INDIAN ECONOMY, RESERVE BANK OF INDIA
In addition to growth in total output, agriculture in India has shown an
increase in average agricultural output per hectare in last 60 years. The table
below presents average farm productivity in India over three farming years for
some crops. Improving road and power generation infrastructure, knowledge
gains and reforms has allowed India to increase farm productivity between 40%
and 500% over 40 years. India's recent accomplishments in crop yields while
being impressive, are still just 30% to 60% of the best crop yields achievable in
the farms of developed as well as other developing countries. Additionally,
despite these gains in farm productivity, losses after harvest due to poor
infrastructure and unorganised retail cause India to experience some of the
highest food losses in the world.
0
1000
2000
3000
4000
5000
6000
Graph 1: Components of GDP (at Factor Cost)
Agriculture & allied activities At Constant Prices
Agriculture & allied activities At Current Prices
Agriculture At Constant Prices
Agriculture At Current Prices
14. Table 3: Agriculture productivity in India, growth in average yields from 1970 to 2010
Crop
Average YIELD, 1970-
1971
Average YIELD, 1990-
1991
Average YIELD, 2010–
2011
kilogram per hectare kilogram per hectare kilogram per hectare[66]
Rice 1123 1740 2240
Wheat 1307 2281 2938
Pulses 524 578 689
Oilseeds 579 771 1325
Sugarcane 48322 65395 68596
Tea 1182 1652 1669
Cotton 106 225 510
Source: Food and Agriculture Organization of the United Nations
15. EFFECT OF LOANS ON AGRICULTURAL GDP: A
REGRESSION ANALYSIS
We examine the effect of the loans advanced by the Co-operatives, Scheduled
Commercial Banks and the Regional Rural banks to the farmers and the effect
to such advances on the agricultural share of GDP of the economy.
REGRESSION MODEL 1:
Here, X (the explanatory variable) = Loans Outstanding; Y = Agricultural
Component of GDP
TABLE 4
Year (end
March) Loans Outstanding
Agricultural
Component of GDP
(at Constant Prices)
Residual Error
Terms
1971-72 8.03
1960.89
-329.8419178
1972-73 8.6
1850.55
-444.7222825
1973-74 9.85
2006.48
-298.7492228
1974-75 11.5
1951.19
-367.1823839
1975-76 13.77
2228.17
-108.2841874
1976-77 16.67
2092.66
-266.8942888
1977-78 18.94
2354.55
-23.08609234
1978-79 22.99
2401.48
-8.416578782
1979-80 28.14
2080.6
-370.3191727
1980-81 32.5
2381.02
-104.6289803
1981-82 37.92
2496.45
-32.37227325
1982-83 36.85
2492.96
-27.33913238
1983-84 43.39
2761.04
188.6461562
1984-85 50.06
2802
176.475923
1985-86 58.58
2807.47
114.0794181
1986-87 62.36
2796.49
72.9896308
1987-88 73.42
2748.2
-63.39937662
1988-89 85.61
3211.14
302.440542
1989-90 95.27
3223.84
238.1933076
1990-91 100.02
3361.76
338.2769346
1991-92 104.19
3284.07
227.3705819
1992-93 116.87
3515.84
358.1373799
1993-94 129.52
3627.64
369.1731445
1994-95 143.61
3799.59
428.8885139
1995-96 177.93
3762.43
118.3507621
1996-97 200.09
4153.77
333.1741252
1997-98 214.69
4030.3
93.40706297
1998-99 235.21
4317.19
216.8439317
1999-00 316.59
4421.13
-327.452707
2000-01 373.02
4394.32
-803.7588181
16. SUMMARYOUTPUT
Regression Statistics
Multiple R 0.93017964
R Square 0.86523416
AdjustedR Square 0.86042109
Standard Error 301.781832
Observations 30
ANOVA
df SS MS F
Significance
F
Regression 1 16371861 16371861 179.7678 1.04185E-13
Residual 28 2550023.7 91072.27
Total 29 18921884
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Intercept 2226.76853 78.537656 28.35288 3.64E-22 2065.89144 2387.6456
Loans Outstanding 7.96555221 0.5941006 13.40775 1.04E-13 6.748592404 9.182512
0
1000
2000
3000
4000
5000
6000
8.03
8.6
9.85
11.5
13.77
16.67
18.94
22.99
28.14
32.5
37.92
36.85
43.39
50.06
58.58
62.36
73.42
85.61
95.27
100.02
104.19
116.87
129.52
143.61
177.93
200.09
214.69
235.21
316.59
373.02
Graph 2: Loans Outstanding Line Fit Plot
Agricultural Component of GDP (at Constant Prices)
Predicted Agricultural Component of GDP (at Constant Prices)
17. Regression Equation:
Intercept:
α = 2226.76853
Coefficient: β = 7.96555221
Equation: Y = α + β X + u,
where Y = Agricultural share of GDP
X = Loan Outstanding
u = Residual error term
TESTING OF HYPOTHESIS:
Under Classical Linear Regression model we test the following (given Variance is
unknown)
Null Hypothesis: H0 : β = 0
vs
Alternative Hypothesis: H1 : β > 0
H1 : β < 0
H1 : β ≠ 0
Two Tail test for Simple Regression
Model
Data Input
Sample Size 30
Estimate 0.00027207
StandardError 0.5941006
Ho 0
Alpha 0.05
ComputedValues
Degree of Freedom 28
t 13.40775
Two-tail test
Absolute Critical Value 2.368451732
Decision RejectHo
p value 1.04E-13
Since the t-statistic value 2.368451732 falls in the rejection region and p-value
is smaller than the level of significance α, thus we reject this null hypothesis.
18. INDIRECT INSTITUTIONAL CREDIT FOR
AGRICULTURE AND ALLIED ACTIVITIES
Regional Rural Banks (RRBs) were established in the year 1976 as a low
cost financial intermediation structure in the rural areas to ensure sufficient
flow of institutional credit for agriculture and other rural sectors. RRBs were
expected to have the local feel and familiarity of the cooperative banks with the
managerial expertise of the commercial banks. RRBs are jointly owned by GoI,
the concerned State Government and Sponsor Banks, the issued capital of a
RRB is shared by the owners in the proportion of 50 percent, 15 percent and 35
percent respectively. In practice they borrowed the politicization in lending,
rampant in cooperative Banks, with the worst form of unionism replicated from
the commercial banks. The low cost structure was also washed away after the
Obul Reddy report which brought parity of pay scales with Commercial Banks.
Several RRBs suffered humongous losses. Government of India and RBI
initiated several measures to improve the financial health of RRBs. During a
review carried out by GOI in the year 2009 it was found that the Capital Risk
Weighted Assets Ratio (CRAR) of the RRBs were too low. Dr. K.C Chakrabarty
committee suggested bringing the CRAR of RRBs to at least 9 percent in a
sustainable manner. The Committee inter-alia recommended recapitalization
support to the extent of Rs. 2,200 crore, to 40 RRBs in 21 States, out of which
Rs.1,100 crore was to be contributed by Central Government. The
recapitalization process which started in 2010-11 has been extended till 2013-
14. Several Committees looked into issues of viability finally amalgamation of
RRBS on grounds of contiguity in a particular region was adopted. Initially,
there were 196 RRBs working in the country. After the second phase of
amalgamation, which started w.e.f. October 1, 2012, 34 RRBs have been
amalgamated to form 14 new RRBs. After a massive consolidation and merger
exercise to strengthen the RRBs, the number of RRBs operating in the country
today has come down to 62
Rural Electrification Corporation Limited (REC) is a leading public
Infrastructure Finance Company in India’s power sector. The company finances
and promotes rural electrification projects across India, operating through a
network of 13 Project Offices and 5 Zonal Offices, headquartered in New Delhi.
The company provides loans to Central/ State Sector Power Utilities, State
Electricity Boards, Rural Electric Cooperatives, NGOs and Private Power
Developers.
19. Data Source: Handbook of Indian Economy, Reserve Bank of India.
SCBs: Scheduled Commercial Banks;
RRBs: Regional Rural Banks;
REC: Rural Electrification Corporation Ltd.
Sources:
1. Reserve Bank of India (in case of SCBs).
2. National Bank for Agriculture and Rural Development (in case of RRBs and
co-operatives).
3. Rural Electrification Corporation Ltd. (in case of REC).
0
200
400
600
800
1000
1200
1
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
Graph 3: Direct Institutional credit for Agriculture
and allied activities (in Billion)
Loans Issued Co-operatives Loans Issued State Governments
Loans Issued SCBs Loans Issued RRBs
Loans Issued Total (2 to 5)
20. SCHEDULED COMMERCIAL BANKS’ ADVANCES
TO AGRICULTURE (OUTSTANDING)
If we look closely at the total advances directed to the rural section of the
country over the years, we can see that the amount of loans credited increased at a
rapid rate. This in turn reduced the number of moneylenders and the usurious
practice which led to a vicious cycle of debt for the farmers. In the table given
below, the loans credit to the farmers through various agencies and banks, directly
or indirectly, are given.
TABLE 5
Year
Total
Direct
Indirect Finance
Total
Direct
&
Finance
Indirect
Finance
Distribution
of
Loans to Loans
to
Other
type of
Total
Indirect
Fertilisers
and
Electricity Farmers Indirect Finance
Other
Inputs
Boards through
PACS/
Finance
FSS/
LAMPS
1974-
75 5.43 0.78 0.98 0.2 0.59 2.55 7.98
1978-
79 17.29 1.09 0.93 0.86 2.92 5.79 23.08
1982-
83 49.03 2.67 3.55 1.68 5.41 13.3 62.33
1986-
87 106.07 3.87 4.78 2.37 4.18 15.2 121.27
1990-
91 161.45 3.29 3.63 1.99 2.99 11.89 173.34
1994-
95 213.34 5.36 11.65 2.24 9.4 28.65 241.99
1998-
99 330.94 14.91 16.27 4.07 45.92 81.17 412.11
2000-
01 404.85 23.04 16.97 3.77 144.47 188.25 593.1
2004-
05 955.65 51.34 41.74 8.61 259.02 360.71 1316.36
2006-
07 1721.28 85.16 113.19 13.6 613.69 825.64 2546.92
________________________________________________________________
Data Source: Handbook of Indian Economy, Reserve Bank of India
All in Rupees (Billion)
PACS: Primary Agricultural Credit Societies
FSS: Farmers’ Service Societies
LAMPS: Large-sized Adivasi Multipurpose Societies
21. Primary Agricultural Credit Services (PACS): This serves a predominantly
important factor in the rural economy. This unit deals directly with the rural
(agricultural) borrowers, gives those loans and collects repayments of loans
given. It is perhaps the final link between the ultimate borrowers on one hand
and the higher financing agencies, namely the SCBS, and the RBI/NABARD on
the other.
Farmer Service Societies (FSS): The National Commission on
Agriculture gave the idea of the formation of Farmers’ Service Societies in 1970.
These societies have been constituted in a few states. The idea ultimately was to
convert the service societies into large-sized multipurpose credit societies. The
agricultural credit or multi-purpose credit societies supply short and medium
credit to members in rural areas. These societies get amount mostly from the
Central Cooperative Banks and State Cooperative Banks. The long-term loans
are supplied by the State Land Development Banks through the Primary Land
Development Banks in the different areas of the states. Recently, the short-
term, medium-term and long-term loans are advanced by a single agency only.
Large-sized Adivasi Multipurpose Societies (LAMPS): the emergence of
LAMPS as a cooperative organisation was specially meant for the tribals. The
tribals took to agriculture about 100 years back. They are actually latecomers to
agriculture. Earlier to it they lived on forest and forest produce. LAMPS are
actually a component of the wider cooperative structure. These are a specific
type of cooperatives.
LAMPS are supposed to be an intermediary agency between the tribal
cultivator and the tribal consumer. In fact, LAMPS have taken the role of a
traditional sahukar or moneylender. The moneylender has always been an
exploiter of the tribal. Viewed from this perspective the LAMPS are created to
remove the moneylender.
Data Source: Handbook of Indian Economy, Reserve Bank of India.
0
1000
2000
3000
4000
1974-75 1978-79 1982-83 1986-87 1990-91 1994-95 1998-99 2000-01 2004-05 2006-07
Graph 4: Direct and Indirect Finance to Rural
Population (in Billions)
Total Direct Finance Indirect Finance Distribution of Fertilisers and
Indirect Finance Loans to Electricity Indirect Finance Loans to Farmers
Indirect Finance Other type of Indirect Indirect Finance Total Indirect Finance
22. ROLE OF RURAL CREDIT IN GROWTH OF RURAL
BANKING IN INDIA
The central bank had its own comprehensive list of unbanked locations
where the need for banking was necessary to promote rural credit and do away
with the existing system. In 1970 a licensing criteria was fixed by the RBI. For
every new branch in an already banked area, three new branches would have to
be set up in unbanked rural or semi-urban areas. The direction was such that
all semi-urban areas would have to be filled up by the end of 1970. Again, in
1977 the RBI took steps to make the ratio 1:4.
The number of rural branches of banks (including RRBs) increased from a
mere 1883 in 1969 to around 35,000 in the early 1990s. Most of this increase
was in unbanked areas. The number of banked locations rose in this period
from around a thousand to over 25,000. The share of rural branches went up
from 18 to 58 percent during the same period. In the period between 1961 and
2000, the average population served by a bank branch fell from around 140,000
to just fewer than 15,000. This reflects the fact that bank building intensity was
much greater in states with a higher proportion of rural unbanked locations in
1969.
TABLE 6
IMPORTANT INDICATORS
June March March March March March
1969 2006 2007 2008 2009 2010
1 2 3 4 5 6
No. of Commercial Banks 89 222 183 175 170 169
(a) Scheduled Commercial Banks 73 218 179 171 166 165
Of which: Regional
Rural Banks - 133 96 91 86 82
(b) Non-Scheduled Commercial
Banks 16 4 4 4 4 4
Number of Offices of Scheduled
Commercial Banks in India ^ 8262 69471 71839 76050 80547 85393
(a) Rural 1833 30579 30551 31076 31667 32624
(b) Semi-Urban 3342 15556 16361 17675 18969 20740
(c) Urban 1584 12032 12970 14391 15733 17003
(d) Metropolitan 1503 11304 11957 12908 14178 15026
Population per office (in thousands) 64.0 16.0 15.0 15.0 14.5 13.8
Deposits of Scheduled Commercial
Banks in India ( ` Billion ) 46.46 21090.49 26119.33 31969.39 38341.10 44928.26
23. of which: (a) Demand 21.04 3646.40 4297.31 5243.10 5230.85 6456.10
(b) Time 25.42 17444.09 21822.03 26726.30 33110.25 38472.16
Credit of Scheduled Commercial Banks
in India ( ` Billion ) 36 15070.77 19311.89 23619.14 27755.49 32447.88
Deposits of Scheduled Commercial
Banks per office (` Million) 5.6 303.6 363.1 420.4 476.0 526.1
Credit of Scheduled Commercial Banks
per office (` Million) 4.4 216.9 268.5 310.6 344.6 380.0
Per Capita Deposits of Scheduled
Commercial Banks (`) 88 19276 23468 28327 33471 38062
Per Capita Credit of Scheduled
Commercial Banks (`) 68 13774 17355 20928 24230 27489
Credit Deposit Ratio 77.5 71.5 73.9 73.9 72.4 72.2
Source: Reserve Bank of India
If the data in the above table is analysed, the table reveals that there has
been a continuous decline in dependence on informal sector for credit needs.
Over time, institutional sector has been gathering a greater role in catering to the
needs of rural sector of the country. Hence institutional sector assumes
important role in serving the credit needs of rural sector.
ROLE OF RURAL CREDIT IN FOODGRAIN
PRODUCTION: A REGRESSION ANALYSIS
The key strategies employed in addressing the production of agricultural
commodities in India have been public sector efforts. It focuses on the
concentration of public sector efforts and resources in regions that have high
production potential. In order to harness the productivity of these areas, the
authorities have developed strategies for increasing cropping intensity as well as
average yields. The areas considered for these strategies were those favoured by
agro-climate resources. Areas where irrigation facilities could be developed
rapidly or already existed were also considered. The essential elements of this
strategy were the expansion of irrigation coverage; increased provision of
essential inputs such as high yield crop varieties, fertilizers, and crop protection
chemicals; expansion of institutional support services; and favourable price
policies (Littlefield, Brigit, & Porteous, 2006). These strategies succeeded
because of replicable production technologies known as the Green Revolution.
Most agricultural development programs focused on high potential areas such
as Uttar Pradesh, Haryana, Punjab, Tamil Nadu, and Andhra Pradesh. These
states account for 50% of the net irrigated area in India.
24. REGRESSION MODEL 2:
The following is a regression model based on the total loan issued by various
banks in the rural system and the food grain production.
TABLE 7
Year
Total Loan Issued
(in millions) (X)
Total Foodgrain
Production (in million
tonnes) (Y)
Predicted
Total
Foodgrain
Production
(in million
tonnes)
Residuals
(u)
1971-
72 8180
108.42
123.071418 -14.65142
1972-
73 8830
105.17 123.248263 -18.07826
1973-
74 11560
97.03 123.991014 -26.96101
1974-
75 11870
104.67
124.075356 -19.40536
1975-
76 13910
99.83
124.630378 -24.80038
1976-
77 16750
121.03
125.403057 -4.373057
1977-
78 20370
111.17
126.38795 -15.21795
1978-
79 21550
126.41 126.708993 -0.298993
1979-
80 26410
131.9 128.031253 3.868747
1980-
81 29280
109.7
128.812094 -19.11209
1981-
82 34360
129.59
130.194209 -0.604209
1982-
83 42960
133.3
132.534011 0.7659891
1983-
84 43520
129.52
132.68637 -3.16637
1984-
85 52440
152.37 135.113234 17.256766
1985-
86 61670
145.54 137.62444 7.9155601
1986-
87 71590
150.44
140.323374 10.116626
1987-
88 77200
143.42
141.849686 1.5703135
1988-
89 91980
140.35
145.870881 -5.520881
1989-
90 93810
169.92
146.368769 23.551231
1990-
91 106280
171.04 149.761481 21.278519
1991-
92 101880
176.39 148.564373 27.825627
1992-
93 115380
168.38
152.237318 16.142682
1993-
94 125300
179.48
154.936252 24.543748
1994-
95 150130
184.26
161.691749 22.568251
1995-
96 187730
191.5
171.92158 19.57842
1996-
97 236920
180.42 185.304701 -4.884701
25. 1997-
98 263450
199.43
192.522717 6.9072826
1998-
99 286560
193.12 198.810254 -5.690254
1999-
00 326970
203.61 209.804602 -6.194602
2000-
01 455340
209.8
244.730223 -34.93022
Regression Equation:
Intercept:
α = 120.846
Coefficient: β = 0.00027207
Equation: Y = α + β X + u,
where Y = Observed Value of Total Food Grain Production (in million tonnes)
X = Total Loan Issued (In millions)
u = Residual error term
Data Source: Handbook
of Indian Economy, RBI
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.871606434
R Square 0.759697776
Adjusted R
Square 0.751115553
Standard
Error 17.21454724
Observations 30
ANOVA
df SS MS F
Significance
F
Regression 1 26232.05 26232.05 88.51994 3.6333E-10
Residual 28 8297.538 296.3406
Total 29 34529.59
Coefficients S. E. t Stat P-value Lower 95%
Upper
95%
Intercept 120.8458852 4.332838 27.8907 5.68E-22 111.9704683 129.7213
Total Loan
Issued (in
millions) 0.00027207 2.89E-05 9.408503 3.63E-10 0.000212835 0.0003313
26. Data Source: Handbook on Indian Economy, RBI
TESTING OF HYPOTHESIS:
Under Classical Linear Regression model we test the following (given Variance is
unknown)
Null Hypothesis: H0 : β = 0
vs
Alternative Hypothesis: H1 : β > 0
H1 : β < 0
H1 : β ≠ 0
0
50
100
150
200
250
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
Graph 5: Total Foodgrain Production (in million
tonnes) (Y)
Total Foodgrain Production (in million tonnes) (Y)
Linear (Total Foodgrain Production (in million tonnes) (Y))
27. Two Tail test for Simple
Regression Model
Data Input
Sample Size 30
Estimate 0.00027207
Standard Error 2.89175E-05
H0 0
Alpha 0.05
Computed Values
Degree of Freedom 28
t 9.408503429
Two-tail test
Absolute Critical Value 2.3684517
Decision Reject H0
p value 3.63E-10
Since the t-statistic value 2.3684517 falls in the rejection region and p-value is
smaller than the level of significance α, thus we reject this null hypothesis.
ROLE OF MICROFINANCE INSTITUTES (MFI)
Micro Finance Institutions (MFIs) accesses financial resources from the
Banks and other mainstream Financial Institutions and provide financial and
support services to the poor.
MFIs are the pivotal overseas organizations in each country that make
individual microcredit loans directly to villagers, microentrepreneurs,
impoverished women and poor families. An overseas MFI is like a small bank
with the same challenges and capital needs confronting any expanding small
venture but with the added responsibility of serving economically-marginalized
populations. Many MFIs are creditworthy and well-run with proven records of
success, many are operationally self-sufficient.
Various types of institutions offer microfinance: credit unions, commercial
banks, NGOs (Non-governmental Organizations), cooperatives, and sectors of
government banks. The emergence of “for-profit” MFIs is growing. In India, these
‘for-profit’ MFIs are referred to as Non-Banking Financial Companies (NBFC).
NGOs mainly work in remote rural areas thereby providing financial services to
the persons with no access to banking services.
The term “transformation,” or commercialization, of a microfinance
institution (MFI) refers to a change in legal status from an unregulated nonprofit
28. or non-governmental organization (NGO) into a regulated, for-profit institution.
Regulated, transformed organizations differ from nonprofits in that they are held
to performance and capital adequacy standards and are supervised by a
financial authority, typically the central bank of the country where they are
registered. A transformed MFI also attracts equity investors. The equity
investors want to ensure that the values of their investments are maintained or
enhanced and elect Board members who share a common vision for the new for-
profit institution. Among transformed MFIs, varying classifications of regulated
institutions exist, the strictest being banks — rural banks and thrift banks —
followed by non-bank financial institutions. Different countries have varied
names for these regulated MFIs.
The microfinance sector consistently focuses on understanding the needs
of the poor and on devising better ways of delivering services in line with their
requirements, developing the most efficient and effective mechanisms to deliver
finance to the poor. Continuous efforts towards automation of operations are
steady improving in efficiency. The automated systems have also helped
accelerate the growth rate of the microfinance sector.
Traditional finance institutions rarely lend money to serve the needs of
low-income families and women headed households. However, the income of
many self employed households is not stable, regardless of its size. A large
number of small loans are needed to serve the poor, but lenders prefer dealing
with large loans in small numbers to minimize administration costs. They also
look for guarantee which many low income households do not have in hand.
Over the last ten years, however, successful experiences in providing finance to
small entrepreneur and producers demonstrate that poor people, when given
access to responsive and timely financial services at market rates, pay back
their loans and use the profits to increase their income and assets. This is not
shocking since the only realistic alternative for them is to borrow the money
from informal market. Community banks, NGOs and credit groups around the
world have shown that these microenterprise loans can be profitable for
borrowers and for the lenders, making microfinance one of the most effective
poverty reducing strategies.
ROLE OF SELF HELP GROUPS (SHG)
From the previous years, it can be said that self-help groups provide one
of the most effective ways of poverty alleviation in poor nations. In India, the
IRDP (Integrated Rural development program) targeted the poorest and the poor
by enabling them to acquire productive assets through bank loans and
government subsidies. A few drawbacks in the implementation phase of the
program prevented it from achieving the required goals. Current annual demand
for credit in India by the poor is estimated to be between Rs 15,000 and Rs
45,000 crore according to the World Bank (2007). The poor people were the
29. victim of ignorance by banking institutions because of the risk involved and the
high transaction costs as well as lack of collateral securities. The inability of
prior strategies to reach the needy through financing resulted in evolution of
self-help groups as a way of reaching them. The SHG-bank linkages model is
considered as a core development strategy by NABARD.
These groups have a high recovery rate and enable the banks and
financial institutions to avail credit to the poor. India has earned its place in
global Microfinance through bank linkage with self-help groups. The two main
models used for availing rural financing in India include the Microfinance
institution (MFI) model and the SHG-Bank Linkage program. These models offer
significant potential for addressing poverty because they rely on the creation of
social capital by providing access to financial services through linkages with
mainstream banks.
The self-help group-bank linkages model was initiated to supplement the
efforts of the existing formal banking system in providing credit to rural farmers.
NABARD started the program using
Five hundred groups, and expanded it to accommodate 2,584,729 groups in
2008. Micro-finance institutions emerged to fill the gap arising from poor
network of banks in rural areas. This model of financing has been lowly
integrated in Northern India because of the reduced bank network in the region.
SHG Linkage is concentrated in southern states where it has played a key role
in enhancing agriculture-based enterprises such as agro-processing. This mean
the SHG Bank Linkage model has not had significant success in Northern India
in alleviating poverty.
______________________________________________________________________________________
The imbalances in outreach from this model have made it ineffective in
achieving the expected results in Northern India in terms of providing financing
and support to farmers. This indicates the weaknesses in efforts developed by
the government as well as banking institutions in availing credit in northern
India. This loophole in capacity of commercial and cooperative banks caused
many farmers to rely on non-institutional sources such as vendors. This is
0
200000
400000
600000
800000
1000000
1200000
1400000
1 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
Graph 6: No. of SHGs Linked
No. of SHGs Linked
30. limited because it is given based on goodwill and social capital accumulated by
the farmer.
REGRESSION MODEL 3:
Explanatory Variable (X): Number of SHGs linked.
Dependent variable (Y): Bank Loan (in Billion)
TABLE 8
Year
Number of
SHGs linked
Agricultural
share of GDP (At
current prices)
Residuals
Error terms
1998-
99 18678
4303.84
12.41291716
1999-
00 81780
4553.02
5.496420761
2000-
01 149050
4606.08 -
1.454955943
2001-
02 197653
4986.2 -
5.005579132
2002-
03 255882
4850.8 -
7.568413888
2003-
04 361731
5446.67 -
12.55808169
2004-
05 539365
5654.26 -
23.54770454
2005-
06 620109
6377.72
-18.6658752
2006-
07 1105749
7229.84 -
59.11299401
2007-
08 1227770
8365.18 -
51.68921754
2008-
09 1609586
9432.05 -
65.72167878
2009-
10 1586822
10835.14 -
40.86498606
2010-
11 1196134
13196.86
9.284734792
2011-
12 1147878
14990.98
35.23165993
2012-
13 1219821
16449.26
66.67180778
2013-
14 1366421
19063.48
82.53032681
2014-
15 1141208
19645.07
74.56161954
Source: Handbook of Indian Economy, RBI
31. ANALYSIS:
Regression Statistics
Multiple R 0.84405168
R Square 0.71242323
Adjusted R
Square 0.69325145
Standard
Error 45.9188146
Observations 17
ANOVA
df SS MS F
Significance
F
Regression 1 78353.2246 78353.22 37.15999 2.04703E-05
Residual 15 31628.0629 2108.538
Total 16 109981.288
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Intercept -14.435056 20.1568818 -0.71614 0.484908 -57.3984322 28.5283204
No of SHGs
linked 0.00012593 2.0658E-05 6.095899 2.05E-05 8.18988E-05 0.00016996
33. CONCLUSION
There does not lay any controversy when it comes to the Indian social
banking programme in expanding the presence of commercial banks in rural
India. The matter of debate that can arise is whether commercial banks in rural
India had a role to play in the type of economic activity in the rural areas and
whether they affected issues like poverty and inequality. The flip side also points
out another debatable issue of the extent to which credit disbursement by the
banking sector were based on need or political power. Finally, the extent to
which any economic gains were due to productive investments associated with
credit provisions, rather than simply attributable to the redistribution of
resources through the banking sector is still pretty unclear.
In a paper titled “Do rural banks matter?” by Robin Burgess and Rohini
Pande (2005), panel data for Indian states from 1961 to 2000 to examine
whether the bank branch expansion programme affected state output and
poverty outcome. A problem which has been discussed above raises its head in
this case: banks are prone to opening more branches in richer states. If this fact
is not accounted for, then it will lead to biased estimates of the relationship
between branch expansion and economic outcomes. Burgess and Pande address
this problem by exploiting the fact that between 1977 and 1990 more bank
branches were opened in financially less developed states. The opposite was
true outside this period. Over this period the change in trend relationship
between the state’s development in the financial sector and opening of branches
allows them to isolate the policy-driven part of branch expansion and to use
that to examine how this expansion affected the Indian economy. It has been
shown above that branch expansion was associated with an increase in the
share of rural credit and savings. In another study, Burgess et al. (2005) used
household data from the National Sample Survey to show that the simultaneous
enforcement of directed bank lending requirements was associated with
increased bank borrowing among the poor, particularly low-caste and tribal
groups.
If the other side is taken into account, it is true that commercial banking
in rural India remained unprofitable. The average default rate for commercial
banks during the 1980s remained static at 42 per cent (as a share of all loans
due for repayment). Default rates were similar across types of borrower – a
finding consistent with poor monitoring of borrowers at all levels, and the fact
that large-scale loan defaults were very often politically condoned.
The relative unprofitability of rural banking led to the demise of social
banking in India. In 1991, at the outset of liberalization, the report of the
Committee on the Financial Sector stated that redistributive objectives should
use the instrumentality of the fiscal rather than the credit system and that
directed credit programmes be phased out and branch licensing policy be
34. revoked. As a result, post-1991, rural bank expansion has been limited and as
studies suggest above, the access of the rural poor to the banking sector
declined. The share of rural banks in total banks has fallen from 58 per cent in
1990 to under 50 per cent by 2000 and the share of total bank credit that went
to rural areas has declined from 15.3 per cent on 1988 to 10.6 per cent in 2000.
The policy recommendation is that this reduction in formal sector lending be
met by micro-credit institutions. In spite of commendable advances by the
Indian micro-credit sector, it is still unclear whether it will be able to achieve a
mobilization of rural savings and a credit outreach to equal that achieved by the
experiment of the Indian social banking system in the 1970s and 1980s.
The analysis suggests the direct agriculture credit amount has a positive
and statistically significant impact on agriculture output and its effect is
immediate. The number of accounts of the indirect agriculture credit also has a
positive significant impact on agriculture output. These results reveal that even
though there are several gaps in the present institutional credit delivery system
like inadequate provision of credit to small and marginal farmers, paucity of
medium and long-term lending and limited deposit mobilisation and heavy
dependence on borrowed funds by major agricultural credit purveyors,
agriculture credit is still playing a critical role in supporting agriculture
production in India. Its role can be further enhanced by much greater financial
inclusion by involving of region-specific market participants, and of private
sector suppliers in all these activities, and credit suppliers ranging from public
sector banks, co-operative banks, the new private sector banks and micro-credit
suppliers, especially self-help groups.
35. REFRENCES
1. Sriram M. S. (2007): ‘Productivity of Rural Credit: A Review of Issues and
Some Recent Literature’, Indian Institute of Management (Ahmedabad),
Working Paper No.2007-06-01.
2. ‘All-India Debt and Investment Survey’, various issues.
3. Burgess, R. and R. Pande (2002): ‘Do Rural Banks Matter? Evidence from the
Indian Social Banking Experiment’.
4. Chandrashekhar,C.P. and S.K. Ray (2005): 'Financial Sector Reform and the
Transformation of Banking', in Ramachandran, V.K. and M. Swaminathan.
5. Mahajan, V. (2004): ‘Deregulating Rural Credit’, Seminar, September.
6. NABARD (2000): Task Force on Supportive Policy and Regulatory
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7. NABARD (2002): Ten Years of SHG-Bank Linkage: 1992-2002
8. NABARD (2006): Annual Report
9. NSSO (2005b): Household Indebtedness in India as on 30.06.2002, All India
Debt and Investment Survey, NSS Fifty-Ninth Round, January–December
2003, National Sample Survey Organisation, Government of India, Report No.
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India.
12.Reserve Bank of India (1991): Report of the Committee on the Financial
System, (chaired by M.Narasimham).
13.Reserve Bank of India (2004): Report of the Advisory Committee on Flow of
Credit to Agriculture and Related Activities
14.Reserve Bank of India (2005): Report of the Internal Group to Examine Issues
Relating to Rural Credit and Microfinance
15.‘Rural Credit in 20th Century India An Overview of History and
Perspectives’ Mihir Shah, Rangu Rao and P.S. Vijay Shankar
16.Keynes, J.M. (1971): ‘Indian Currency and Finance, Collected Writings’, Vol.I
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Scheduled Commercial Banks: March 2006
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36. 19.‘Rural Credit in India - An Overview of History and Perspectives’, Devaraja
T.S. Department of Commerce University of Mysore Hassan, India
20.http://www.economicsdiscussion.net/india/rural-credit/5-major-sources-of-
rural-credit-in-india/12861
21.‘Rural Credit Delivery in India: Structural Constraints and Some
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22.http://www.epw.in/system/files/pdf/1961_13/1/reserve_bank_s_role_in_rural_
finance.pdf
23.‘Agricultural Marketing and Rural Credit for Strengthening Indian
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concerns.
25.‘Microfinance and Rural Credit: Is it an Alternative Source of Rural
Credit’, P.Srinivasa Rao, Y.J.Priyadarshini.
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27.Economic Weekly: ‘The All-India Rural Credit Survey Viewed as a Scientific
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