Institutional credit to Indian agriculture : defaults and policy options / by Ashok Gulati and Seema Bathla

The rural financial institutions, with the sole aim of eliminating informal finance through moneylenders, have always been providing agricultural credit at subsidized interest rates with negligible collateral and other liberalized provisions. The net result is that while informal finance continues to hold a prominent place in rural finance, the RFIS are heading towards a state of financial unsustainability. Consequent upon this, RBI and NABARD have initiated several institutional and policy measures to revamp credit institutions for speedy mobilization and effective delivery of credit to the masses in a more efficient way. Steps have also been taken to give an indirect admission to informal finance through bank-self-help-groups linkage programme. The programme, which forms part of micro finance, has revived research interest in the subject of sustainable rural credit. The revival has also been triggered by the growing importance of devising ways to enhance financial services to the rural poor in several countries.

Are the existing policy changes effective enough to reduce the incidence of defaults in Indian rural credit and bring back the financial health of banking institutions? Is micro finance programme through formation of SHGS a viable solution? Can micro finance be extended to agricultural activities for overall rejuvenation of rural financial institutions? Can international experiences on micro finance throw any light on this issue? In what way can credit be injected into the system so that a higher rate of growth of agricultural economy is achieved without jeopardizing financial health of the rural financial institutions? These are some of the issues that the present study addresses.

The study was made possible by the generous support of NABARD. We are grateful to Mr Y.C.Nanda, Chairman, NABARD, for discussing some of the ideas contained in this study, and encouraging us by giving literature on the subject and also promising to experiment some of these in extending the reach of rural credit through NABARD. We also had an opportunity to discuss in detail the new approaches that can be taken in rural credit with the Minister of State for Finance, Shri Balasaheb Vikhe Patil, who is keen to change the scene of rural credit in India. We are thankful to him for sharing with us his ideas and also respond to those being proposed by us. Our thanks also go to Dr. V. Puhazhendhi for providing us relevant literature and data on the subject.