Productivity of Rural Credit: A Review of Issues and some Recent Literature

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Productivity of Rural Credit A Review of Issues
and some Recent Literature

• M S Sriram
• Indian Institute of Management
• Ahmedabad

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Introduction

• Policy Assumptions
• The most significant policy intervention has to
  be made in agriculture in rural India
• Credit is important and has a causal relation
  with productivity both in agriculture and non
  farm sectors
• Opening up the supply of credit is desirable
• Cost of credit is critical and needs to be
  regulated

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Causality is elusive

• Credit is a sub component of inputs that go into
  agriculture
• Data on credit is available largely for the
  formal segment
• Diversity across crops, regions and practices
  makes it difficult to undertake such an exercise
  on a nationwide basis

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Recent Literature

• Burgess and Pandey
• Opening of bank branches in unbanked areas and
  thus increased supply of formal credit has
  helped to reduce poverty.
• Impacts on poverty might have come from
  non-agricultural sector
• No evidence of elite capture with bank loans
• agricultural loans disbursed across all land
  holding segments prior to 90s
• Microfinance has not been successful in reaching
  real backward areas

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Recent literature

• Vaidyanathan
• Increased credit supply indebtedness may not
  lead to increase in agricultural productivity
• Private capital formation without concurrent
  effect on economics of agriculture is worrying
• If credit is not appropriately directed, it might
  lead to deep indebtedness and distress
• Focus on public capital formation and
  infrastructure to address the problem of
  productivity

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Recent literature

• Rakesh Mohan
• Growth in formal agricultural credit has slowed
  down, but should not be a cause for worry
• Credit to be seen more as a proportion of
  Agricultural GDP that as a proportion of overall
  supply of credit

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Is there increase in value of output? Is credit
the reason?
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Is Agriculture Profitable?

• Not very profitable in general
• Profitability figures vary widely across states
• Income from cultivation Rs.949 per month across
  the country
• States like Jharkhand, Kerala, TN, WB and
  Rajasthan report greater income from wage than
  from agriculture
• Average interest costs are less than 1 of cost
  of cultivation, never exceeding 3 in the country
• Source NSSO 59th Round

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Relative costs of inputs

• Inputs that might not have an impact on
  productivity
• Labour 22, lease rental 5, other expenses 15
• Inputs that might impact productivity
• Fertilisers 23, Irrigation 12, Seeds 16 Total
  51 of input costs
• Can increased credit significantly impact
  productivity?

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Who needs Credit?

• Cultivators
• Census data for India 31.7 - Rural 40
• Primary data from Dungarpur 25 only BPL
  census 59
• Primary data from Dharmapuri 25 - census 39
• Primary data from W.Godavari 15 - census 12
• Backward regions have more cultivators
• Financing subsistence agriculture is actually
  financing food security.
• How are these loans serviced? Is there something
  else out there?

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Agricultural Productivity Other Issues

• Changing technology deskilling of farmer
• Inputs moving out of farmer control
• Seeds moving towards research intesity
• Research and Extension services moving from
  public to private space
• Pesticides being peddled as extended service of
  extension
• No comprehensive risk mitigation products
• Downside risks are unlimited, upside benefits
  seem to have a ceiling

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Rural Credit Beyond Agriculture

• Supply side interventions IRDP, SGSY, other
  self employment schemesMicrofinance Supply
  side as it is design inducedMicrofinance Does
  not sufficiently address diverse livelihood
  opportunities

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Strategies for making Rural Credit Productive

• Reduce Vulnerability
• Understand pressure points Anirudh Krishna
• RCL of Velugu Project
• Maturing of SHGs Alwer
• Diversification of livelihoods Dharmapuri

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Strategies for making Rural Credit Productive

• Increase opportunities through response to demand
  side patterns better targeting
• Understand demand induced product attributes
• Understand the space in which each player
  operates
• Provide effective competition in these spaces

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Desirable policy non interventions

• Recognise that there are no easy-quickfix
  solutions
• Initiate exercise to understand the cost of
  delivering rural financial service products in a
  scientific manner
• possibly examine activity based costing
• Remove formal and informal interest rate caps
• Allow banks to exploit rural areas
• they would be better than the current
  alternatives
• Leave operational decisions like settlements,
  rescheduling and write offs as commercial
  decisions of the institutions
• Continue to remove bottlenecks for microfinance
  to flourish
• Continue to direct branch licencing towards rural
  areas
• Continue to provide targets for rural lending

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• Thanks
• mssriram_at_iimahd.ernet.in
• www.iimahd.ernet.in/mssriram

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The SEWA Framework
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Product Attributes
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Purpose-Source Mapping