Credit fails to reach rural India

The government’s recent efforts at financial inclusion have so far not met with significant success in rural areas.

A recent NSSO study shows that only 27% of cultivator households get any institutional credit.

Another 22% borrow from money-lenders while the remaining 51% have no access to credit at all. This means that over half of rural Indians do not borrow on account of lack of access or because they do not have the capacity to borrow. They are so poor that lenders do not trust their repaying ability.

A large number of them are from unirrigagted dry areas, according to NABARD, chairman, YSP Thorat.

Rural credit accounts for only 15% of all bank credit. Of the Rs 11, 24,300cr lent by commercial banks as on March ‘05, only Rs 1,60,479cr went to rural India. Even this little bit of credit is distributed patchily across India.

Five states — Andhra Pradesh, Karnataka, Uttar Pradesh, Maharashtra and Tamil Nadu together account for 50% of outstanding rural credit as of March ‘05 end. The entire North East comprising the seven states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura account for barely 3% of outstanding loans.

In fact, the region has outstanding loans of Rs 5063cr only, which is just a fourth of the total loans extended from rural Andhra Pradesh, which at Rs 20,511 crore has the highest rural loans.

As far as farm credit is concerned barely a third is investment credit. There are also methodological problems of estimating the right amount of investment credit. This means that very little goes to fixed capital formation. A good portion of rural loans are retail and not for agricultural activities.

Besides, the average per capita loan size of a self help group, through which most rural credit is provided, is Rs 150-200 which is inadequate for reasonable entrepreneurial investment. There is a need to increase the size of such loans.