Thursday, March 8, 2012

Financial Inclusion or Exclusion

One can safely assume that the government will set a large rural credit flow target for 2012-13 in the forthcoming Budget. That has been the pattern for the last seven years. Ambitious targets are set, and more than met. 
But if so much credit is really flowing to the needy, why are farmers being pummelled by the burden of private credit and taking their lives? 
As per the National Crime Records Bureau, 2.57 lakh farmers committed suicide between 1995 and 2010.
The Finance Minister, Mr Pranab Mukherjee, has said that banks had achieved half the target for rural credit in six months up to September 2011 — Rs 2.23 lakh crore — against the target of Rs 4.75 lakh crore for the full year 2011-12. 
He is likely to be correct on the target being surpassed. The targets set during the last three years from 2008-09 to 2010-11 were Rs 280,000 crore, Rs 3,25,000 crore, and Rs 3,75,000 crore. The achievement against these targets, respectively, were around Rs 2,87,000 crore, Rs 3,85,000 crore, and Rs 4,47,000 crore. Nabard's Executive Director, Mr S. K. Mitra, has said that the farm sector would need Rs 40 lakh crore during the Twelfth Plan.


The government's spokespersons never tire of speaking on ‘inclusion' — while the policies being followed are effectively resulting in more and more ‘exclusion'. 
It's like an absurd problem — supposing one pipe can fill a water tank in ten hours, while another can empty it in one hour, then, how long will it take to fill the tank when both the pipes are open? 
‘Exclusion' is happening much faster than the ‘inclusion', or the people are being sent out of the banking network at a faster pace than the rural credit amount flowing into it. 
In other words, while the sums being doled out as credit are increasing, those who need credit aren't within the reach of the formal system.
A government appointed committee (U. C. Sarangi Committee, June 2010) said that only 14 per cent of the marginal farmers were accessing credit from institutional sources. A World Bank report noted that 87 per cent of the marginal and 70 per cent of the small farmers weren't getting credit through institutions. In effect, approximately 18 per cent of farmers are able to avail of bank loans.


These aren't accidental happenings, but a result of the policy orientation after 1990. Banks' excessive concern with the commercial profits has distanced them from the rural poor. While increased access to rural credit is the avowed goal, in actual practice, there has been a reduction in the number of rural branches.
 Similarly, specialised rural credit institutions have been reoriented to reduce their importance in rural credit. For instance, the share of co-operatives in the farm credit which was more than 62 per cent in 1993-94 had come down to about 12 per cent by 2009. 
A worse scenario can be seen in case of regional rural banks. These banks were set up with the goal to supply cheap credit only to the people below poverty line in rural areas. Their reorganisation has made them more commercial than most commercial banks. They are not region-based anymore. 
The transaction cost in these banks is higher than in others.The withdrawal of these institutions yielded place to private money lenders and for-profit microfinance organisations. 
The right kind of rural credit delivery in India presupposes the availability of cheap, timely and hassle-free credit, on terms convenient to the farmer. An element of subsidy is imperative till the small farming becomes a self-supporting activity. It should immediately halt the process of commercialising rural banking.
(The author is an independent researcher on issues of rural credit.)
(This article was published on March 7, 2012)

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