Bharat Book Bureau

The rural credit market appears to be confronted with a paradox. The informal sources of finance, be they local money lenders, landlords, traders, etc. charge more than 20% rate of interest, often keep land as collateral against loan, and still have a very high recovery rate. On the other hand, rural financial institutions (RFIs) charge almost half of this interest rate, do not take land as collateral for most of the crop loans, and still face high defaults.

Therefore, it is queer to find out what stands in the way of fast mobilization of formal credit in the rural areas. Several Committees and Task Forces have identified major inhibiting factors to be increasing incidence of overdues or non-performing assets (NPAs) in the rural credit system, high transaction costs, regulated interest rates, inability of the financial institutions to cater to the changing demands of the agricultural sector, inherent limitations of the RFIs in inequitable distribution of loans and limited reach. ” industry analysis reports ”

The net outcome is that while informal finance still holds a prominent place in rural finance, the RFIs, especially, cooperatives are heading towards a state of financial unsustainability. It is, thus, recommended that the RFIs should be strengthened so as to accelerate the flow of credit to meet the credit demands of the agricultural sector and enhance overall development of the rural economy.

In this context, several research questions can be raised. First, what are the loan recovery rates of RFIs and the resultant NPAs or overdues over a period of time? Second, since not all overdues are bad debts, what is the magnitude of bad debts or defaults in Indian agriculture that is likely to be written off? Third, what policy and institutional measures have been taken to reduce the incidence of bad debts in RFIs, particularly after the financial reforms in 1991 were set in? Finally, how and in what ways RFIs can be revitalized?

The present study intends to explore these issues by first analyzing the temporal behaviour of deposits, loan outstandings and overdues in each of the Rfs viz. cooperatives (both short term and long term), commercial banks and regional rural banks from 1980 onwards. Thereafter, it estimates the extent of bad debts or defaults in each of the RFIs at all India level and across seventeen major states from 1980 to 1997. The factors behind mounting defaults in Indian agriculture are also reviewed.

The study, then, highlights the policy and institutional measures that have been suggested and implemented by several Committees and Task Forces to minimize defaults and revamp RFIs. It also evaluates Bank-SHGs linkage programme of NABARD by juxtaposing successful international experiments on micro finance. The study, finally, proposes two models of agricultural finance that can be instituted by NABARD and adopted by the RFIs.

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