Access to Credit in Rural India: Some Emerging Trends and Patterns

Using two rounds of household level National Sample Survey (NSS) data, this paper examines the trends and patterns of borrowing and lending in the Indian rural [r]

Access to Credit in Rural India: Some Emerging Trends and Patterns

Sunit Arora

School of Social Sciences

Jawaharlal Nehru University

New Delhi, India

Abstract

Adoption of neo-liberal policies in the 1990s adversely affected the rural credit market in India There was a contraction in the growth of rural banking network and the flow of credit to the agricultural sector, which continues to be the mainstay of India’s rural economy, dried up Even though there has been a slow revival in the flow of credit to the rural sector, access to credit remains highly unequal

Using two rounds of household level National Sample Survey (NSS) data, this paper examines the trends and patterns of borrowing and lending in the Indian rural credit market The distribution of loans has been studied according to the purpose of borrowing, sources of credit and the terms of contract A comparative analysis is made of institutional and non-institutional sources of credit, focusing on the regional variations and accessibility across household types

It is found that households falling in upper quintiles of asset ownership borrow more for income generating purposes as compared to borrowing for consumption Also, these households have a higher share of institutional borrowing in comparison to the households falling in the lower quintile of asset ownership Even though the share of non-institutional lending in the rural credit market has declined, the role of professional money lenders has become more important They now service one-third of the rural credit market in India as compared to 20 percent in 2002-03 As long as the benefits of the schemes to boost rural credit supply accrue disproportionately to the socially and economically better off segments of the rural population, the agrarian crisis which can partly be viewed as a consequence of the inadequacy of credit will only deepen

Access to Credit in Rural India: Some Emerging Trends and Patterns

Ready availability of credit and its absence thereof shapes the patterns of existence of rural households Availability of credit on reasonable terms enables vulnerable rural households to invest in income generating activities and thereby improve their quality of life Simultaneously, it assists them in meeting consumption purposes, costs incurred in legal battles and domestic ceremonies and most importantly unforeseen medical expenditure

Indian banking can be divided in three distinct periods: 1) the period from 1947-1968 was

a period when banking was concentrated in the hands of a few large private groups and bank advances preferred urban industrial sector leading to unequal expansion of banking, 2) the period from 1969 when fourteen major Indian banks were nationalized, which overlapped the early phase of Green Revolution and 3) the phase which began in 1991 as the process of liberalisation got under way in India The study group of the National Credit Council, 1968, headed by D.R Gadgil, established the fact that the sectors which were crucial for the economy were neglected in terms of proportion of credit available to them It was shown that the agriculture sector which accounted for 50 percent of Indian GDP was severely credit starved New credit policy was formulated, with its primary focus on providing credit to those sectors, regions and individuals which were outside the ambit of institutional finance: agriculture and cottage industries, unbanked and under-banked areas, dalit and scheduled tribes households This phase has been referred in the literature as the phase of ‘social and developmental banking’ The new policy objectives transformed the role of banking sector, making it a driver for upliftment of rural sector

‘It was only after 1969 that a multi- institutional approach to credit provision in the rural areas became policy, with commercial banks, RRBs and cooperative institutions establishing wide geographical and functional reach in the countryside’ (Ramachandran and Swaminathan, 2005, p xxiii)

The two decades spanning from 1969-1990 witnessed tremendous expansion in the geographical coverage of the Indian banking system but this also meant that commercial

banks had to extend banking services to certain areas and households which were not profitable for them To deal with the increasing concerns of the banks regarding unprofitability led to the appointment of Committee on the Financial System in 1991 by Reserve Bank under the chairmanship of M Narasimham The Narasimham Committee placed its report centrally within the broader process of ‘liberalisation’ of the Indian economy It wanted to move towards ‘a vibrant and competitive financial system to sustain the ongoing reform in the structural aspects of the real economy’ and took a clear view against using the credit system for redistributive objectives and argued that ‘directed credit programmes should be phased out’ It wanted the branch licensing policy to be revoked and interest rates to be deregulated Future branch expansion was to depend on

"need, business potential and financial viability of location”

Contraction of Rural Banking Network

There had been a tremendous increase, between 1969-1990, in the number of branches in rural sector have shown, both in absolute terms and as a percentage of total bank branches in India Burgess and Pande (2005) have shown that opening branches in rural unbanked locations in India was associated with reduction in rural poverty and that state-led expansion of credit and savings facilities can have implications for poverty reductions With a mere 1443 branches, rural sector banking was highly inadequate accounting for only 17.6 percent of the total bank branches and the condition was worse

in terms of the credit disbursed as the rural sector accounted for just about 3.3 percent of the total outstanding credit in 1969 Following bank nationalization and changes in the banking structure in the country, “RBI policy of social coercion through licensing and targets was a success in forcing banks to open branches in hitherto unbanked locations” (Shah et al, 2007) The share of rural branches increased through the 1970s and 1980s and peaked in 1990 at 58 per cent There was a simultaneous increase in the share of rural accounts in the total outstanding amount However, post liberalisation the share of rural branches has been on the decline and the banking activity in the rural sector slowed down

in the period With thrust given to more profitable ventures, the concentration of branches

increased in urban and metropolitan areas and the share of rural branches which was 58 percent in 1990 has come down to 34 per cent in 2019 Similarly, the share of rural sector

in the total outstanding credit which increased from just around 3 percent to 14 percent

during 1969-1990, has been on the decline and as of 2019 was around 8 per cent This

reversal in policy stance has resulted in the decline in the growth of rural banking

Figure 1 Growth of Rural Banking, 1969-2019

Source: RBI, Banking Statistics: Basic Statistical Returns, various issues

Declining Flow of Credit to Agriculture

As the income from agriculture materialises post harvesting, those engaged in crop cultivation and other related activities are forced to rely on informal channels for their personal consumption needs For meeting uncertain expenses of ceremonies like marriages and funeral, impending legal battles and the like, the only recourse is to seek informal credit Accessing institutional loans for personal reasons become unviable for wide sections of rural population because of their inability to offer collateral The total number of accounts with the scheduled commercial banks in the rural sector stand at 5,60,52,493 as of March 2018 which account for 28.5 per cent of the total accounts in

0

10

20

30

40

50

60

70

1969 1975 1980 1985 1990 1995 2000 2005 2010 2015 2019

Rural Branches as per cent of

Total Branches

India However, their share in the total amount outstanding is a meagre 8.2 per cent which shows the skewed credit disbursal

In the 1970s and 1980s, following bank nationalisation, agriculture was accorded a vital place in institutional credit operations The credit share of agriculture sector from formal institutions rose to 11 percent in mid 1970s and to 18 percent in the decade of 1980s A major change which was seen post liberalisation was the decline in the share of bank credit to agricultural sector There was a distinct move away from agriculture with the share of credit to this sector falling to 9.9 percent in 2000 as compared to 16 per cent in

1991 Shetty (2005) explains this decline in the share of agricultural credit through the change in RBI policy which led to the dilution of priority sector targets From an earlier target of 18 percent of the net bank credit to agriculture as direct advance to allowing indirect credit in fulfilling this target, this reform was one of the main reasons for the move of sectoral distribution of credit away from agriculture

Figure 2 Share of Agriculture Credit, 1990-2018

Source: RBI, Banking Statistics: Basic Statistical Returns, various issues

The share of agriculture sector credit in the total credit outstanding started increasing after 2000, but at 13.7 per cent in 2018 it is still well-below the 1991 levels This decline

15.9

11.8

9.9 10.8

11.7 13.2

13.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1990 1995 2000 2005 2010 2015 2018

Percentage Share of Agriculture Credit in

Total Credit

could have been a result of changes in classification of centres according to 1991 census but the sharp decline in the credit-deposit ratio challenges the credibility of this explanation The decline in C-D ratio for rural branches and the shrinking network of rural branches in the decade post liberalisation points to the adverse effect it had on the

rural credit sector

Rural branches as a percentage of the total banking network which had started declining after peaking in 1990 have now stabilised at around 33 per cent In terms of outstanding credit, these branches have fared better as after the high achieved in 1990 and reaching its lowest in 2010, there has been a slow revival Similarly share of agricultural credit in the total outstanding credit has also shown an improvement in the recent years However, the striking feature of this phase of Indian banking is that that even after two decades the banking parameters like the share of rural branches in total banking network, credit-deposit ratios and flow of credit to rural areas have not been able to reach the level that they enjoyed in the pre 1991 years The adoption and implementation of neo-liberal policies in 1990s adversely affected rural credit market as it led to a contraction of the existing rural banking network and restricted the flow of credit to the agricultural sector which continues to be the mainstay of India’s rural economy

Structural Dynamics of Rural Credit Market in India

In the following sections of the paper, we use the data provided by National Sample Survey Organization (NSSO) in 2002-03 and 2012-13 to examine the trends and patterns

of borrowing in the rural credit market in India Herein, the distribution of loans has been studied according to the purpose of borrowing, sources of credit and the terms of contract A comparative analysis is made of institutional and non-institutional sources of credit, focusing on the regional variations and accessibility across household types The inter related questions of who borrows what from whom have special significance not only for policy formulation but are also critical for gaining a deeper insight into the overall working of India’s agrarian economy as a whole

The most important data source on the rural credit market in India is the All India Debt and Investment Survey (AIDIS), brought out by National Sample Survey Organization (NSSO) at decennial intervals since 1971-72 These surveys provide information on household assets, indebtedness and capital expenditure at all-India level for both urban and rural areas For the present study, household-level data from two consecutive rounds

of AIDIS was used The reference years for these surveys were 1991-92 (48th round), 2002-03 (59th round) and 2012- 13 (70th round) AIDIS encapsulates information about both institutional and non-institutional sources of credit which allows a comprehensive analysis of the rural credit market

The paper uses household-level data from three consecutive rounds of the All-India Debt Investment Surveys (AIDIS) carried out by the National Sample Survey Office (NSSO) One of the most crucial variables which is useful in studying rural credit market incidence of indebtedness, which is defined by NSS as ‘the percentage of indebted households’ has been calculated for various categories of households using AIDIS data

Studying Indebtedness: An Interstate Analysis

A key indicator of access to credit as defined by NSSO is the incidence of indebtedness,

which is the proportion of households which are indebted A household is considered to

be indebted if the household had any cash loan outstanding on 30th June of the year in which the survey is being conducted The variations in levels of indebtedness can give us

an insight into the ability of the differing categories of households to secure access to credit facilities The percentage of indebted households, representing incidence of indebtedness (IoI) for rural areas of the country calculated using the NSSO data is 30.97 per cent

The trend observed in the last four decades is of increasing indebtedness which can be taken to be an indicator of improved access to credit All India incidence of indebtedness has shown an increase from around 20 percent in 1982-82 to 31 percent in 2012-13 However, the increase is not that significant for the population as a whole, especially in

the last decade from 2002-03 as this was the decade when financial inclusion policies were given priority by the country’s prime lending institutions

The interstate analysis of the nature of indebtedness indicates a wide variation across States with Andhra Pradesh and Kerala having the highest IOI at almost 50 per cent on one end of the spectrum, Chhattisgarh and Jharkhand having less than 20 percent incidence of indebtedness at the other end of the spectrum The southern States have a significant advantage with comparatively higher level of indebtedness while the eastern states lag behind in this respect The most populated state Uttar Pradesh which account for 16 per cent of the total population of India has only one-fourth of its rural population indebted to various credit agencies

Table1 shows that southern states have performed much better with regard to accessing absolute terms as well as in securing loans through institutional channels More than half

of the outstanding credit of all the southern states is owed to institutional sources of credit Eastern states record low incidence of indebtedness in terms of institutional as well as total credit which means a double burden for these states For example, in Bihar the incidence of indebtedness is significantly low, that is, less than 30 percent This shows that an extremely limited number of people in the state residing in rural areas have access to credit What further compounds the situation is that only 16 percent of rural credit comes from public institutional lenders in the state However, the one factor that remains constant in all the states needs to be mentioned here: in a majority of states non institutional lenders account for more than 50 percent of the borrowing

Table 1 Share of Institutional and Non-Institutional Lending and Incidence of Indebtedness in Rural Areas of Different States

Institution

al lending

Share of Non-institutio nal lending

IoI to Formal Sources

IoI to Informal Sources

IoI to All Sources

Source: Computed using AIDIS data, 2012-13

Different sets of parameters can be relevant in ascertaining the extent of development achieved by different states Herein, three key indicators have been selected as points of scrutiny, viz incidence of poverty, per capita net state domestic product and human

development index for different states There is strong positive correlation between level

of development of states and their incidence of indebtedness to institutional sources When seen in conjunction with incidence of poverty (state-wise) there is a significant negative correlation between incidence of poverty and incidence of borrowing from institutional sources The correlation between the incidence of indebtedness to institutional sources and HDI comes out to be strongly positive indicating that the two variables move in the same direction Even per capita NSDP has a positive correlation with this incidence Taking institutional sources of credit as a point of analysis yields vastly different results In contrast to the institutional sources, the incidence of incidence

of indebtedness to non institutional sources show a negative correlation with both per capita NSDP and State wise HDI

Why do Rural Households Borrow? —Borrowing According to purpose

Table 2 indicates the proportions in which credit was used for different purposes The broad headings under which the purpose for taking loans was classified by NSSO were slightly different in the two rounds of data collected, but if we reclassify them as expenditure on production related purposes and that which is not spent on production activities, the purpose wise usage of the credit at the All India level for the rural sector as

a whole reveals that the proportion used for production-related activities has actually declined over time, with almost 60 percent of credit been used for non-business related household expenditure in 2012-13 as compared to 47 percent being used for the same a decade ago

Table 2 Percentage share of amount of borrowing by purpose by rural households Purpose of Loan 2002-03 2012-13

Productive purposes in farm business 40.16 30.75

Productive purposes in non- farm

Non-business household expenditure 46.46 58.43

Source: Computed using AIDIS data, various rounds