ROLE OF RURAL CREDIT IN INDIAN

PERSPECTIVE

STUDENT DETAILS

Name: Ahana SarkarStream: Post Graduate Diploma in Management (PGDM)Semester: 2nd

Specializations: Marketing Finance

Enrolment Number: 12015008012041Year: 2015-2017College: Institute of Engineering & Management, Saltlake (Kolkata)Faculty Guide: Ms. Anuradha Saha

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.

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 19 th 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 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.

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 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 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 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 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 2002Institutional Agencies 7.2 14.8 29.2 61.2 64.0 57.1Government 3.3 5.3 6.7 4.0 5.7 2.3Co-op. Society/bank 3.1 9.1 20.1 28.6 18.6 27.3Commercial bank incl. RRBs 0.8 0.4 2.2 28.0 29.0 24.5Insurance -- -- 0.1 0.3 0.5 0.3Provident Fund -- -- 0.1 0.3 0.9 0.3Others institutional agencies* -- -- -- -- 9.3 2.4Non-Institutional Agencies 92.8 85.2 70.8 38.8 36.0 42.9Landlord 1.5 0.9 8.6 4.0 4.0 1.0Agricultural Moneylender 24.9 45.9 23.1 8.6 6.3 10.0Professional Moneylender 44.8 14.9 13.8 8.3 9.4 19.6Traders and Commission Agents 5.5 7.7 8.7 3.4 7.1 2.6Relatives and Friends 14.2 6.8 13.8 9.0 6.7 7.1Others 1.9 8.9 2.8 4.9 2.5 2.6Total 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.

Decline of the Moneylender: Something fairly 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, especially if her venture is a risky one. But the same situation 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.

 Table 2: Average GDP growth rates of agriculture and other sectors at 1999-2000 prices

(Per cent)

PeriodTotal

Economy

Agriculture & allied

Crops & livestoc

k

Non-agricultur

e1 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."

1960-61

1963-64

1964-65

1965-66

1969-70

1970-71

1971-72

1972-73

1973-74

1974-75

1978-79

1979-80

1980-81

1981-82

1982-83

1983-84

1986-87

1987-88

1988-89

1990-91

1991-92

1992-93

1998-99

1999-000

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 PricesAgriculture At Constant Prices Agriculture At Current Prices

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.

Table 3: Agriculture productivity in India, growth in average yields from 1970 to 2010

CropAverage 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

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 -329.84191781972-73 8.6 1850.55 -444.72228251973-74 9.85 2006.48 -298.74922281974-75 11.5 1951.19 -367.18238391975-76 13.77 2228.17 -108.28418741976-77 16.67 2092.66 -266.89428881977-78 18.94 2354.55 -23.086092341978-79 22.99 2401.48 -8.4165787821979-80 28.14 2080.6 -370.31917271980-81 32.5 2381.02 -104.62898031981-82 37.92 2496.45 -32.372273251982-83 36.85 2492.96 -27.339132381983-84 43.39 2761.04 188.64615621984-85 50.06 2802 176.4759231985-86 58.58 2807.47 114.07941811986-87 62.36 2796.49 72.98963081987-88 73.42 2748.2 -63.399376621988-89 85.61 3211.14 302.4405421989-90 95.27 3223.84 238.19330761990-91 100.02 3361.76 338.27693461991-92 104.19 3284.07 227.37058191992-93 116.87 3515.84 358.13737991993-94 129.52 3627.64 369.17314451994-95 143.61 3799.59 428.88851391995-96 177.93 3762.43 118.35076211996-97 200.09 4153.77 333.17412521997-98 214.69 4030.3 93.407062971998-99 235.21 4317.19 216.8439317

1999-00 316.59 4421.13 -327.4527072000-01 373.02 4394.32 -803.7588181

8.03

9.8500000000000113.77

18.9428.14

37.9243.39

58.5873.42

95.27

104.19

129.52

177.93

214.69

316.590

1000

2000

3000

4000

5000

6000

Graph 2: Loans Outstanding Line Fit Plot

Agricultural Component of GDP (at Constant Prices)Predicted Agricultural Component of GDP (at Constant Prices)

SUMMARY OUTPUT

Regression Statistics

Multiple R0.9301796

4

R Square0.8652341

6

Adjusted R Square0.8604210

9

Standard Error301.78183

2Observations 30

ANOVA

  df SS MS FSignificance

F

Regression 11637186

11637186

1179.767

81.04185E-

13

Residual 282550023.

791072.2

7

Total 291892188

4

 Coefficient

sStandard

Error t Stat P-value Lower 95%Upper 95%

Intercept2226.7685

378.53765

628.3528

83.64E-

22 2065.891442387.645

6

Loans Outstanding7.9655522

10.594100

613.4077

51.04E-

136.74859240

4 9.182512

Regression Equation:

Intercept:

α = 2226.76853Coefficient: β = 7.96555221

Equation: Y = α + β X + u, where Y = Agricultural share of GDPX = Loan Outstandingu = 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 InputSample Size 30

Estimate 0.00027207Standard Error 0.5941006

Ho 0Alpha 0.05

Computed Values

Degree of Freedom 28t 13.40775

Two-tail testAbsolute Critical Value 2.368451732

Decision Reject Hop 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.

INDIRECT INSTITUTIONAL CREDIT FORAGRICULTURE 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.

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

2000-010

200

400

600

800

1000

1200

Graph 3: Direct Institutional credit for Ag-riculture and allied activities (in Billion)

Loans Issued Co-operatives Loans Issued State Governments Loans Issued SCBsLoans Issued RRBs Loans Issued Total (2 to 5)

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).

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 Indire

ct

 

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 7.981978-79 17.29 1.09 0.93 0.86 2.92 5.79 23.081982-83 49.03 2.67 3.55 1.68 5.41 13.3 62.331986-87 106.07 3.87 4.78 2.37 4.18 15.2 121.271990-91 161.45 3.29 3.63 1.99 2.99 11.89 173.341994-95 213.34 5.36 11.65 2.24 9.4 28.65 241.991998-99 330.94 14.91 16.27 4.07 45.92 81.17 412.112000-01 404.85 23.04 16.97 3.77 144.47 188.25 593.12004-05 955.65 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 SocietiesFSS: Farmers’ Service Societies LAMPS: Large-sized Adivasi Multipurpose Societies 

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.

1974-75 1978-79 1982-83 1986-87 1990-91 1994-95 1998-99 2000-01 2004-05 2006-070

5001000150020002500300035004000

Graph 4: Direct and Indirect Finance to Rural Population (in Billions)

Total Direct Finance Indirect Finance Distribution of Fertilisers andIndirect Finance Loans to Electricity Indirect Finance Loans to FarmersIndirect Finance Other type of Indirect Indirect Finance Total Indirect Finance

Data Source: Handbook of Indian Economy, Reserve Bank of India.

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 INDICATORSJune March March March March March1969 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 165Of which: Regional Rural Banks - 133 96 91 86 82 (b) Non-Scheduled Commercial Banks 16 4 4 4 4 4Number of Offices of ScheduledCommercial 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 13.8Deposits of Scheduled Commercial Banks in India ( ` Billion ) 46.46

21090.49

26119.33

31969.39

38341.10

44928.26

of which: (a) Demand 21.04 3646.40 4297.31 5243.10 5230.85 6456.10

(b) Time 25.4217444.0

921822.0

326726.3

033110.2

538472.1

6Credit 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) 5.6 303.6 363.1 420.4 476.0 526.1Credit of Scheduled Commercial Banks per office (` Million) 4.4 216.9 268.5 310.6 344.6 380.0Per Capita Deposits of Scheduled Commercial Banks (`) 88 19276 23468 28327 33471 38062Per 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 72.2Source: 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.

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

YearTotal 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

145.54 137.624447.915560

11986-87   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

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

Data Source: Handbook of Indian Economy, RBI

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.871606434R Square 0.759697776Adjusted R Square 0.751115553Standard Error 17.21454724Observations 30

ANOVA

  df SS MS FSignificance

FRegression 1 26232.0 26232.0 88.5199 3.6333E-10

5 5 4

Residual 288297.53

8296.340

6

Total 2934529.5

9      

 Coefficient

s S. E. t StatP-

valueLower 95%

Upper 95%

Intercept 120.84588524.33283

8 27.8907 5.68E-22111.970468

3 129.7213

Total Loan Issued (in millions) 0.00027207 2.89E-05

9.408503 3.63E-10

0.000212835

0.0003313

Regression Equation:

Intercept:

α = 120.846Coefficient: 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

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

2000-010

50

100

150

200

250

Graph 5: Total Foodgrain Production (in mil-lion tonnes) (Y)

Total Foodgrain Production (in million tonnes) (Y)Linear (Total Foodgrain Production (in million tonnes) (Y))

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

Two Tail test for Simple Regression Model

Data InputSample Size 30

Estimate 0.00027207Standard Error 2.89175E-05

H0 0Alpha 0.05

Computed ValuesDegree of Freedom 28

t 9.408503429

Two-tail testAbsolute 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 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 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 usingFive 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.

1 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-080

200000

400000

600000

800000

1000000

1200000

1400000

Graph 6: No. of SHGs Linked

No. of SHGs Linked______________________________________________________________________________________

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 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

YearNumber 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 -1.45495594

3

2001-02 197653

4986.2 -5.00557913

2

2002-03 255882

4850.8 -7.56841388

8

2003-04 361731

5446.67 -12.5580816

9

2004-05 539365

5654.26 -23.5477045

42005-06 620109

6377.72-18.6658752

2006-07 1105749

7229.84 -59.1129940

1

2007-08 1227770

8365.18 -51.6892175

4

2008-09 1609586

9432.05 -65.7216787

8

2009-10 1586822

10835.14 -40.8649860

62010-11 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- 1141208 19645.07 74.5616195

15 4Source: Handbook of Indian Economy, RBI

ANALYSIS:

Regression StatisticsMultiple R 0.84405168R Square 0.71242323Adjusted R Square 0.69325145Standard Error 45.9188146Observations 17

ANOVA

  df SS MS FSignifican

ce F

Regression 178353.22

4678353.2

237.1599

9 2.04703E-05

Residual 1531628.06

292108.53

8

Total 16109981.2

88

 Coefficie

ntsStandard Error t Stat

P-value Lower 95%

Upper 95%

Intercept -14.43505620.15688

18-

0.716140.48490

8 -57.398432228.52832

04

No of SHGs linked 0.00012593

2.0658E-05

6.095899

2.05E-05 8.18988E-05

0.00016996

1867881780

149050

197653

255882

361731

539365

620109

1105749

1227770

1609586

1586822

1196134

1147878

1219821

1366421

1141208

-50

0

50

100

150

200

250

300

Graph 6: No of SHGs linked Line Fit Plot

Bank loan (in Billion) Predicted Bank loan (in Billion)

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

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.

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 theTransformation 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 framework for Micro Finance in India

7. NABARD (2002): Ten Years of SHG-Bank Linkage: 1992-2002

8. NABARD (2006): Annual Report

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10.Reserve Bank of India (1954): All-India Rural Credit Survey Report.

11.Reserve Bank of India (1989): A Review of Agricultural Credit System in 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

17.Reserve Bank of India (2006): Quarterly Statistics on Deposits and Credit of

Scheduled Commercial Banks: March 2006

18.Reserve Bank of India, ‘Annual Report’, various issues. 

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 Corrective Measures’ K.J.S. Satyasai, Department of Economic Analysis and Research, National Bank for Agriculture and Rural Development (NABARD)

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 Agriculture’ Acharya S.S.

24.Presidential Address by Shri Y.S.P. Thorat, Rural Credit in India; Issues and 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 Enquiry’, Daniel Thorner.