1

Rural Indebtedness, Assets and Credit: Inter-State Variations in

India
1. Introduction
Till Independence in India, the credit requirements of rural
households were mainly met from the non-institutional sources, as the
banking and cooperative movement were in the nascent stages. The rural
households, both cultivators and non-cultivators, require credit for the
productive and nonproductive purposes. Even now the purposes remain
the same. At present, the productive purposes of cultivators include loans
both working capital and fixed capital. Working capital is used to buy seeds,
fertilisers, pesticides, etc., and to pay taxes to the government, etc. Fixed
capital is meant for permanent improvements on land, digging and
deepening of wells, fencing of land, and for purchasing implements and
machinery, etc. Non-cultivators also use loans for creation of income
generating assets in the sense of formation of fixed capital and for
circulating capital in the sense of working capital. The unproductive
purposes are the same for both the cultivators and non-cultivators, such as
celebration of marriages, births and deaths, for litigation, etc.
Rural credit was dominated by the non-institutional (unorganized or
private) sector in both 1951-52 and 1961-62 as that sector provided about
93.0 percent of the total borrowings in 1951-52 and 82.0 percent of such
borrowings in 1961-62 (Ghatak, 1976). The non-institutional sources were
mainly agricultural and professional money lenders. Even by the early
1970s, the studies in Eastern India of Bhaduri (1973), Prasad (1973) and
Chandra (1975) theorized that prevailing agrarian relations were ofsemi-
feudalism, as the rural exploiters were operating both as land-owners and
money-lenders, subjecting the share cropper tenants, marginal farmers and
agricultural labourers to involuntary exchange in rural credit, land and
product markets so that they were in perpetual indebtedness. The data of
village level studies of Bhaduri and Chandra was related to the early 1970s
in West Bengal and that of Prasad belonged to Bihar of early 1970s. But,
Bardhan and Rudra (1978) conducted a large scale survey in the East
India, involving 276 villages from three States viz., West Bengal, Bihar and
Uttar Pradesh (East) and their study could not find many of the so called
semi-feudal characteristics. Thus, in this Eastern India syndrome (as aptly
called by Thorner (1982)), Bardhan and Rudra concentrated on refutation
of semi-feudal thesis.
However, after the nationalisation of banks in India, on 19th July
1969, a lot of change in the operation of institutional credit in rural areas
has been seen. As per Clive (1990), as shown in Table-1, the shares of
debt from non-institutional sources came down (i) for total households from
92.8 percent in 1951 to 82.7 percent in 1961 and then to 70.8
rural india remains largely unbanked even today.
financial inclusion and similar high sounding
initiatives havent made a dent yet. probably because
bankers have no understanding of the needs of rural
india. it is definitely not high tech banking that
villagers are looking for. they arent looking for a
place to deposit their surplus cash either. as they
have no cash . they arent fascinated by any time money
( ATM ) machines too. what they want is loan to run
their farms . they are definitely not comfortable with
paper work and the delay. rural folk are no cheats. if
they make money they will definitely repay the loan. if
they lose money the loan is stuck. no choice there. so
what the banks should do in rural areas is (1) lend
money . know the customer and just lend . keep the
procedure simple.(2) put an insurance in place . if the
farmer lose money for genuine reasons waive the debt.
in short banks should imitate the local money lender if
it is to take root in the rural areas.

Lending by Commercial Banks

. With greater autonomy and private sector participation in public
sector banks, the institutional structure of branch network should
not be diluted.
. As most new banks lack the capacity to either appraise or effec-
tively supervise lending, specialized support agencies need to be
developed or earmarked on sectoral as well as regional basis to
help them meet their mandatory lending requirement
efficaciously.
. The banks should recruit agricultural graduates for rural
branches
and should take the help of local NGOs, self-help groups or
village development functionaries in the appraisal of loan applica-
tions to save time and cost.
. Banks should tie up with the corporate sector, processors,
contractors under contract farming arrangements and related
firms
for funding farmers and thereby linking marketing with credit.
For establishing such linkages banks should also take the
initiative
in organizing the farmers into homogeneous groups.

Lending by RRBs
. RRBs should be given greater autonomy and flexibility in
planning
and lending policies, to restore their comparative advantage in
rural lending.
. They should take the initiative in organizing farmers into homo-
geneous groups or farmers. companies for linking credit with
input supply and output marketing.
Lending by Cooperatives
. The cooperative credit system should be rejuvenated by
recapitaliz-
ation and giving the cooperatives greater autonomy and infusing
greater professionalism. A package of Rs. 15,000 crore, as recom-
mended by the Task Force (submitted in January 1995) should
be expeditiously implemented.
. States should be allowed to borrow from RIDF for meeting their
share for recapitalization of cooperative banks.
. For imparting greater autonomy and accountability to coopera-
tives, states should adopt the Model Bill suggested by the
Chaudhary Brahma Prakash Committee. Also, cooperative banks
should be brought under the supervisory control of
RBI/NABARD.
. The cooperative credit system should be de-layered, i.e. where
district central cooperative banks (DCCBs) are weak, state
cooperative banks (SCBs) should finance directly to primary
agriculture credit societies (PACSs), and where PACSs are weak,
primary cooperative agriculture and rural development banks
(PCARDBs) should be liquidated. Also, weak DCCBs should be
taken over by SCBs.
. States should be persuaded to take folow-up action on the Multi-
State Cooperatives Act, passed in 2002.
. PACSs should be asked to mobilize deposits, conduct open forum
meetings, take initiatives in nurturing self-help groups of their
areas and introduce a system of audit by professionals.
. While the term-lending credit structure and short-term
credit
structure within cooperatives should be integrated, care should
be taken that the already weak long-term credit structure does
not weaken the short-term credit structure. Several options are
available. One is to permit short-term credit institutions to
disburse
long-term credit. Two, strong long-term institutions can be
merged
with short-term institutions. Three, very weak long-term
institutions
may be liquidated. Four, to those long-term institutions which
are neither too weak nor strong, three to five years package may
be given to improve; when they become viable, they may be
merged with short-term institutions.