The Hindu Business Line : Institutionalising money-lending?

Registering money-lenders to give cheaper loans to farmers is not going to solve farmers' problems. The solution has to be found from within the banking framework, by making it provide credit to landless labourers, marginal farmers and women entrepreneurs.

EXPANDING THE banking framework is the key to rural credit. — Sandeep Saxena

One did not expect the Reserve Bank of India, the most upstanding of all institutions in the country, to contemplate registering money-lenders. Is institutionalising them the only way to solve the problem of farm credit that is one of the causes for the recent spate farmer suicides?

History of rural credit

To understand the various facets of rural credit, one needs to go back into history. One finds evidence of not one but two structural breaks in the rural credit pattern. The first one happened, with much fanfare in 1969, when 14 major banks were nationalised so as to "subserve" the national priorities of agricultural growth, poverty alleviation, etc. The second, more interestingly, seems to have happened in 1991, with the ushering in of reforms.

Nationalisation seems to have worked best between 1970 and 1991. For, in this period, the number of rural branches increased seven-fold to nearly 65,000 in 1991. This also had a qualitative aspect to it; through such programmes as the Lead Bank scheme, the RBI identified "unbanked" areas to be targeted by commercial banks.

The permission to open more branches in "banked" locations was made in part conditional on banks agreeing to expand in an `unbanked' area. Also, farm loans were given at softer rates and agriculture and small-scale industries became "priority sector lending". In this period, the dependence on the money-lender fell from 70 per cent of rural credit to about 46.5 per cent. While there are no data to prove this, the RBI has shown time and again how qualitative measures help strengthen the quantitative aspects of credit-related issues.

While the reduced dependence on the moneylender was good, it was not good enough because it implied that still nearly half of the credit accessed by rural population even in 1991 was non-institutional. The reason for this has much to do with the asset ownership patterns in Rural India.

Credit can be accessed against some collateral, such as a piece of land or a house. In a country where landless labourers are the norm rather than the exception, formal credit patterns are bound to be different.

By 1991, it was thus clear that merely by expanding rural bank branch networks the problems will not be solved. After 1991 even that stopped.

No increase in rural branches

A casual observation would show that with the beginning of reforms in 1991, expansion of rural branches reached a plateau, even as the number of branches in the "already banked" urban locations started increasing. Reasons are not hard to find.

With the liberalisation came competition and for survival, cost-cutting became essential for banks. Rural branches are not easy to run. The transaction costs are high vis-à-vis the low loan amounts. Repayment is poor.All these factors means that profit-conscious banks could ill-afford expanding into Rural India. Thus, branch expansion and with it, growth of institutional rural credit, slowed. This led to the resurgence of the money-lender.

A World Bank survey revealed another problem. It showed that corruption was rampant in rural banks; bribes amounted to nearly 20 per cent of the loan.

This means the actual cost of loans far surpassed the indicated amount. This together with the procedures and paper work proved so daunting as to make the moneylender a friend of the humble farmer.

Thus, Rural India faces a situation of low quantity and quality credit systems.

50 % versus 8 %

institutionalising the money-lender the solution? The RBI apparently proposes to "register" the moneylenders so that they can access low-cost credit and then pass it on to the rural households at low, RBI-"stipulated" rates. All this is being done on the premise that the money-lender can reach where no rural bank can. But what is the guarantee that there will be no rent-seeking by the money-lender?

Second, there are no exclusive "money-lenders" in India's villages. There are rarely people who lend money and do little else, who can be identified and then registered with the RBI. Money-lenders are mostly zamindars, grocers or goldsmiths, who lend the surplus cash their businesses generate. It will be a job identifying these "money-lenders" in the lakhs of villages across India and persuading them to avail themselves of such schemes. Anyway, would they want to forego interest rates of 50 per cent for a paltry 8 per cent?

The solution, thus, has to lie within the banking framework. If banks have not performed make them accountable for it. Also, they should be set new targets, including lending to landless labourers, marginal farmers, and women entrepreneurs. Success and failure stories need to be documented and analysed. Technical teams should be created to give cropping advice to farmers and suggest alternative means of livelihood to farmers in lean times. Bank targets need to have a non-financial component; a one-size-fits-all solution can never work in India's villages. If targets are not adhered to, the penalty should be punitive. Credit is a gateway to rural welfare and that should be opened wide.

The RBI's record of managing the financial economy is impeccable. It has managed to keep inflation in check without affecting credit growth. The institutional component of rural credit has grown over the years; slowly but surely. Should the state of the farmers, especially the spate of suicides, lead to the central bank changing its cautious approach that has paid rich dividends?

(The author is Economic Advisor, Mahratta Chamber of Commerce, Industries and Agriculture, Pune. She can be contacted at manasip@mcciapune.com)

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