The Hindu Business Line : Bank credit and the environment

Like a living being bank credit completes the cycle of birth, growth and death. In the process credit serves the twin purposes of activating entrepreneurship cycle as well as bringing sustainable development. An effective credit cycle depends on how it’s nurtured. Credit performance is dependent on relationship banking skills and the external environment. If the cycle of credit is not complete it does not initiate the entrepreneurship cycle for sustainable developme nt.

For a smooth credit function, the bank manager has to necessarily know the borrower’s behaviour and the purposes of credit, like a sensible parent who understands his child and works for its growth. If credit strays away from its purposes it creates a mass of idle energy, like an errant child who grows to be a burden on society.

The Committee on Financial Inclusion, headed by Dr C. Rangarajan, recommended the creation of National Mission for Financial Inclusion to give low-income households and individuals access to institutional funds. But credit end-use continues to be the biggest challenge before economists and bankers.

It is not only banks that are responsible for credit end-use, social and political factors play a role as well. Effective credit cycle depends on quality extension services, development banking skills and de-politicisation of credit agencies.

The main objective of credit is to create a surplus for borrowers and, thereby, improve their living conditions. Negative external environment can erode surplus generated from micro enterprises in the villages. Moneylenders who still constitute more than 30 per cent of the informal credit devour a large portion share of the villagers’ surplus, pushing some of them into a debt trap.

Strengthening the formal credit delivery mechanism will reduce the impact of moneylenders. Poor management of farm input drains the surplus generated from credit activities. If farmlands in villages lose their fertility because of overuse of chemical fertilisers and pesticides, farmers will have to spend more on inputs.

The cost of irrigation increases when the soil loses its moisture-absorption capacity. As per the survey report of Dehradun-based Central Soil & Water Conservation Research and Training Institute(CSWRTI) and the National Bureau of Soil Survey and Land Use Planning, Nagpur, the decline in the value of total agricultural output due to soil erosion varies from Rs 5,250 crore to Rs 8,400 crore.

Soil erosion

According to the survey, an estimated 5,334 million tonnes of soil is lost every year in the country. Here credit will not generate surplus unless the soil’s original quality is restored and farmers are told which seeds, fertiliser and pesticide to choose from the market which is flooded with low-grade inputs.

Simultaneously, a transparent supply chain is a must for farmers to increase their share of profit. Shortage of water and power always adds to the unproductive hours in the villages. Besides, the growing intensity of natural calamities due to global warming and poor management of forest cover in coastal regions affect those involved in small-scale economic activities for their livelihood.

In 2005, seven natural disasters of high intensity struck the country, resulting in an estimated loss of $ 200 billion. The agriculture sector which provides 59 per cent of total employment, constituting a workforce of 222 million across 6.4 lakh villages, is always at the receiving end.

FAO’s Director-General, Mr Jacques Diouf, has warned that India could lose up to 125 million tonnes of cereals as a result of climate change. There is a need to address the fundamental problems that affect the credit cycle across the country.

(The author is a Pune-based freelance writer.)

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