Description
banking project
Rural Indebtedness, Assets and Credit: Inter-State Variations in India
1. Introduction Till Independence in India, the credit requirements of rural households were mainly met from the non-institutional sources, as the banking and cooperative movement were in the nascent stages. The rural households, both cultivators and non-cultivators, require credit for the productive and nonproductive purposes. Even now the purposes remain the same. At present, the productive purposes of cultivators include loans both working capital and fixed capital. Working capital is used to buy seeds, fertilisers, pesticides, etc., and to pay taxes to the government, etc. Fixed capital is meant for permanent improvements on land, digging and deepening of wells, fencing of land, and for purchasing implements and machinery, etc. Non-cultivators also use loans for creation of income generating assets in the sense of formation of fixed capital and for circulating capital in the sense of working capital. The unproductive purposes are the same for both the cultivators and non-cultivators, such as celebration of marriages, births and deaths, for litigation, etc. Rural credit was dominated by the non-institutional (unorganized or private) sector in both 1951-52 and 1961-62 as that sector provided about 93.0 percent of the total borrowings in 1951-52 and 82.0 percent of such borrowings in 1961-62 (Ghatak, 1976). The non-institutional sources were mainly agricultural and professional money lenders. Even by the early 1970s, the studies in Eastern India of Bhaduri (1973), Prasad (1973) and Chandra (1975) theorized that prevailing agrarian relations were ofsemifeudalism, as the rural exploiters were operating both as land-owners and money-lenders, subjecting the share cropper tenants, marginal farmers and agricultural labourers to involuntary exchange in rural credit, land and product markets so that they were in perpetual indebtedness. The data of village level studies of Bradbury and Chandra was related to the early 1970s in West Bengal and that of Prasad belonged to Bihar of early 1970s. But, Bardhan and Rudra (1978) conducted a large scale survey in the East India, involving 276 villages from three States viz., West Bengal, Bihar and Uttar Pradesh (East) and their study could not find many of the so called semi-feudal characteristics. Thus, in this Eastern India syndrome (as aptly called by Thorner (1982)), Bardhan and Rudra concentrated on refutation of semi-feudal thesis.
However, after the nationalisation of banks in India, on 19th July 1969, a lot of change in the operation of institutional credit in rural areas has been seen. As per Clive (1990), as shown in Table-1, the shares of debt from non-institutional sources came down (i) for total households from 92.8 percent in 1951 to 82.7 percent in 1961 and then to 70.8 Rural India remains largely unbanked even today. financial inclusion and similar high sounding initiatives havent made a dent yet. Probably because bankers have no understanding of the needs of rural India. It is definitely not high tech banking that villagers are looking for. They aren’t looking for a place to deposit their surplus cash either. As they have no cash. They aren’t fascinated by any time money (ATM ) machines too. What they want is loan to run their farms. They are definitely not comfortable with paper work and the delay. Rural folk are no cheats. If they make money they will definitely repay the loan. If they lose money the loan is stuck. No choice there. So what the banks should do in rural areas is (1) lend money. Know the customer and just lend. Keep the procedure simple.(2) put an insurance in place . if the farmer lose money for genuine reasons waive the debt. In short banks should imitate the local money lender if it is to take root in the rural areas. Lending by Commercial Banks,With greater autonomy and private sector participation in public sector banks, the institutional structure of branch network should not be diluted. As most new banks lack the capacity to either appraise or effec-tively supervise lending, specialized support agencies need to be developed or earmarked on sectoral as well as regional basis to help them meet their mandatory lending requirement efficaciously. The banks should recruit agricultural graduates for rural branches and should take the help of local NGOs, self-help groups or village development functionaries in the appraisal of loan applica-tions to save time and cost. Banks should tie up with the corporate sector, processors, contractors under contract farming arrangements and related firms for funding farmers and thereby linking marketing with credit. For establishing such linkages banks should also take the initiative in organizing the farmers into homogeneous groups. Lending by RRBs RRBs should be given greater autonomy and flexibility in planning and lending policies, to restore their comparative advantage in rural lending. They should take the initiative in organizing farmers into homogeneous groups or farmers. companies for linking credit with input supply and output marketing. Lending by Cooperatives . The cooperative credit system should be rejuvenated by recapitaliz-
ation and giving the cooperatives greater autonomy and infusing greater professionalism. A package of Rs. 15,000 crore, as recommended by the Task Force (submitted in January 1995) should be expeditiously implemented. . States should be allowed to borrow from RIDF for meeting their share for recapitalization of cooperative banks. . For imparting greater autonomy and accountability to cooperatives, states should adopt the Model Bill suggested by the Chaudhary Brahma Prakash Committee. Also, cooperative banks should be brought under the supervisory control of RBI/NABARD. . The cooperative credit system should be de-layered, i.e. where district central cooperative banks (DCCBs) are weak, state cooperative banks (SCBs) should finance directly to primary agriculture credit societies (PACSs), and where PACSs are weak, primary cooperative agriculture and rural development banks (PCARDBs) should be liquidated. Also, weak DCCBs should be taken over by SCBs. . States should be persuaded to take folow-up action on the MultiState Cooperatives Act, passed in 2002. . PACSs should be asked to mobilize deposits, conduct open forum meetings, take initiatives in nurturing self-help groups of their areas and introduce a system of audit by professionals. . While the term-lending credit structure and short-term credit structure within cooperatives should be integrated, care should be taken that the already weak long-term credit structure does not weaken the short-term credit structure. Several options are available. One is to permit short-term credit institutions to disburse long-term credit. Two, strong long-term institutions can be merged with short-term institutions. Three, very weak long-term institutions may be liquidated. Four, to those long-term institutions which are neither too weak nor strong, three to five years package may be given to improve; when they become viable, they may be merged with short-term institutions.
doc_447473084.doc
banking project
Rural Indebtedness, Assets and Credit: Inter-State Variations in India
1. Introduction Till Independence in India, the credit requirements of rural households were mainly met from the non-institutional sources, as the banking and cooperative movement were in the nascent stages. The rural households, both cultivators and non-cultivators, require credit for the productive and nonproductive purposes. Even now the purposes remain the same. At present, the productive purposes of cultivators include loans both working capital and fixed capital. Working capital is used to buy seeds, fertilisers, pesticides, etc., and to pay taxes to the government, etc. Fixed capital is meant for permanent improvements on land, digging and deepening of wells, fencing of land, and for purchasing implements and machinery, etc. Non-cultivators also use loans for creation of income generating assets in the sense of formation of fixed capital and for circulating capital in the sense of working capital. The unproductive purposes are the same for both the cultivators and non-cultivators, such as celebration of marriages, births and deaths, for litigation, etc. Rural credit was dominated by the non-institutional (unorganized or private) sector in both 1951-52 and 1961-62 as that sector provided about 93.0 percent of the total borrowings in 1951-52 and 82.0 percent of such borrowings in 1961-62 (Ghatak, 1976). The non-institutional sources were mainly agricultural and professional money lenders. Even by the early 1970s, the studies in Eastern India of Bhaduri (1973), Prasad (1973) and Chandra (1975) theorized that prevailing agrarian relations were ofsemifeudalism, as the rural exploiters were operating both as land-owners and money-lenders, subjecting the share cropper tenants, marginal farmers and agricultural labourers to involuntary exchange in rural credit, land and product markets so that they were in perpetual indebtedness. The data of village level studies of Bradbury and Chandra was related to the early 1970s in West Bengal and that of Prasad belonged to Bihar of early 1970s. But, Bardhan and Rudra (1978) conducted a large scale survey in the East India, involving 276 villages from three States viz., West Bengal, Bihar and Uttar Pradesh (East) and their study could not find many of the so called semi-feudal characteristics. Thus, in this Eastern India syndrome (as aptly called by Thorner (1982)), Bardhan and Rudra concentrated on refutation of semi-feudal thesis.
However, after the nationalisation of banks in India, on 19th July 1969, a lot of change in the operation of institutional credit in rural areas has been seen. As per Clive (1990), as shown in Table-1, the shares of debt from non-institutional sources came down (i) for total households from 92.8 percent in 1951 to 82.7 percent in 1961 and then to 70.8 Rural India remains largely unbanked even today. financial inclusion and similar high sounding initiatives havent made a dent yet. Probably because bankers have no understanding of the needs of rural India. It is definitely not high tech banking that villagers are looking for. They aren’t looking for a place to deposit their surplus cash either. As they have no cash. They aren’t fascinated by any time money (ATM ) machines too. What they want is loan to run their farms. They are definitely not comfortable with paper work and the delay. Rural folk are no cheats. If they make money they will definitely repay the loan. If they lose money the loan is stuck. No choice there. So what the banks should do in rural areas is (1) lend money. Know the customer and just lend. Keep the procedure simple.(2) put an insurance in place . if the farmer lose money for genuine reasons waive the debt. In short banks should imitate the local money lender if it is to take root in the rural areas. Lending by Commercial Banks,With greater autonomy and private sector participation in public sector banks, the institutional structure of branch network should not be diluted. As most new banks lack the capacity to either appraise or effec-tively supervise lending, specialized support agencies need to be developed or earmarked on sectoral as well as regional basis to help them meet their mandatory lending requirement efficaciously. The banks should recruit agricultural graduates for rural branches and should take the help of local NGOs, self-help groups or village development functionaries in the appraisal of loan applica-tions to save time and cost. Banks should tie up with the corporate sector, processors, contractors under contract farming arrangements and related firms for funding farmers and thereby linking marketing with credit. For establishing such linkages banks should also take the initiative in organizing the farmers into homogeneous groups. Lending by RRBs RRBs should be given greater autonomy and flexibility in planning and lending policies, to restore their comparative advantage in rural lending. They should take the initiative in organizing farmers into homogeneous groups or farmers. companies for linking credit with input supply and output marketing. Lending by Cooperatives . The cooperative credit system should be rejuvenated by recapitaliz-
ation and giving the cooperatives greater autonomy and infusing greater professionalism. A package of Rs. 15,000 crore, as recommended by the Task Force (submitted in January 1995) should be expeditiously implemented. . States should be allowed to borrow from RIDF for meeting their share for recapitalization of cooperative banks. . For imparting greater autonomy and accountability to cooperatives, states should adopt the Model Bill suggested by the Chaudhary Brahma Prakash Committee. Also, cooperative banks should be brought under the supervisory control of RBI/NABARD. . The cooperative credit system should be de-layered, i.e. where district central cooperative banks (DCCBs) are weak, state cooperative banks (SCBs) should finance directly to primary agriculture credit societies (PACSs), and where PACSs are weak, primary cooperative agriculture and rural development banks (PCARDBs) should be liquidated. Also, weak DCCBs should be taken over by SCBs. . States should be persuaded to take folow-up action on the MultiState Cooperatives Act, passed in 2002. . PACSs should be asked to mobilize deposits, conduct open forum meetings, take initiatives in nurturing self-help groups of their areas and introduce a system of audit by professionals. . While the term-lending credit structure and short-term credit structure within cooperatives should be integrated, care should be taken that the already weak long-term credit structure does not weaken the short-term credit structure. Several options are available. One is to permit short-term credit institutions to disburse long-term credit. Two, strong long-term institutions can be merged with short-term institutions. Three, very weak long-term institutions may be liquidated. Four, to those long-term institutions which are neither too weak nor strong, three to five years package may be given to improve; when they become viable, they may be merged with short-term institutions.
doc_447473084.doc