The Indian economy is passing through tough times, trying hard to unshackle itself from the complex trinity of low growth, inflation and a falling rupee. As a part of inclusive growth policy through greater financial inclusion, one of the ways forward is demand creation through greater institutional credit, that would not only generate growth, but also insulate people from the high-debt burden and inflation. This problem is more acute in rural India, where people have to resort to non-institutional sources, dominated by money lenders, for their credit needs.
A lot needs to be made clear with regard to rural credit markets. First, according to the All India Debt and Investment Survey, the policy of extending institutional credit through bank branches has been reasonably successful. If bank credit had a share of 2.4% in rural household debt in 1971, it rose to 24.5% by 2002. Second, there are policy concerns regarding insufficient credit extended by banks to the agriculture sector even though non-performing asset loans were lower than what was in the industrial sector. Third, there are genuine concerns among policy-makers regarding rural poor carrying a heavier burden of debt than the rich as they have to increasing rely on non-institutional credit sources; and finally, banks on their own, in the post-liberalisation era, anticipating insufficient profits and huge transaction costs resort to credit rationing.
The core policy issue concerning policy-makers is what could prompt greater institutional flow to rural India and more so to the poor people? Information asymmetry regarding borrowers is hampering institutional flow to these markets. In contrast to the stated cause, bank branches today are better equipped with access to borrowers profile to mitigate concerns about adverse selection. The logical issue that then arises is what else is hampering these institutional flows to rural India.
To address these policy concerns critical information diffusion like their eligibility criteria, repayment benefits, and rescheduling of their loan instalments during difficult times in an open and transparent manner is vital, as is highlighted by an Reserve bank of India-funded National Council of Applied Economic Research study on rural credit markets. Banks could ensure this diffusion through an appropriate human resource development policy and by devising incentives in their pay structures.
This information diffusion by bank branches has the potential to trigger a chain reaction that allows present customers with good repayment records to scale up their existing credit limits. It will also motivate genuine prospective borrowers to avail credit, as loans to new customers would be sanctioned only after careful assessment of their land titles, assets, trade-credit linkages, fellow guarantees, and history of transactions and default by the Credit Information Bureau of India Limited. Later, in stages, a host of financial services and products could be offered to customers with a good track record. Such an exercise would not only induce financial discipline but also financial inclusion of the rural masses. To illustrate it further, large no-frill accounts are expected to be opened using the Unique Identification Number or the MGNREGA job cards. This would facilitate the financial inclusion of a vast number of poor and marginalised sections in a phased manner. Before long, banks would possess their transaction history and can offer credit and other financial products to new customers with financial discipline. The Union cabinet’s recent green signal for the establishment of all-women banks with a R1,000-crore corpus will be a great enabler, especially in regard to the expansion and deepening of the SHG-bank linkages, without the collaterals, as is evident from the success of the Grameen Bank in Bangladesh.
The financial inclusive policy of extending institutional credit through bank branches has been reasonably successful over the decades. We need to build on the existing institutional structure, which now has a far greater degree of technological embedment, that has considerably reduced both the transaction and operational cost of the banks. This has, in other words, enhanced the capabilities of banks to cater to a large number of customers. Banks with appropriate information diffusion in an open and transparent manner would realise their full potential in terms of enhanced rural institutional flow, easing of the debt burden on the poor and a much healthier balance sheet.
Tejinder Singh is a consultant at National Council of Applied Economic Research, New Delhi
The views expressed by the author are personal