Evolution of the Rural Credit System in India

Rural financial market development is a complex process. The creation of the formal credit structure for financial agriculture and other rural activities commenced in India in the early part of this century with the introduction of co-operatives. It received a big push during the plan era. The All India Rural Credit Survey Committee (AIRCS) 1954, forms the edifice for the policy towards the development of the Institutional credit structures. The committee highlighted the awful inadequacy in the supply of institutional credit to the rural sector and proposed an integrated scheme of reorganization many more committees and recommendations. Priority sector lending, lead bank scheme, services area approach, setting up of NABARD, are some of the outcomes of the repeated scrutiny of the system.

Coming to the recent committees, the Agriculture Credit Review Committee (ACRC) 1989, examined the existing rural credit system in detail. It highlighted the yawning gap between income generated and costs incurred by rural credit institutions, necessitating external assistance. The committee recommended greater autonomy for commercial banks; the weakness of RRBs were seen as endemic to the system with non-viability built into them. Co-operatives were sought to be strengthened through thrust on deposit mobilization and reduction of political interference. The Narsimham Committee on Financial Sector Reforms 1991, among other things, recommended a redefinition of priority sector, gradual phasing out of directed credit programmes to 10% of aggregate bank credit and deregulation of interest rates.

Looking at the situation today, the excercises seems to have resulted in a scenario where "an imposing superstructure of credit institutions has been built which one committee after another has kept reshuffling or adding to" (Dandekar, 1993). Commenting broadely on the exercise in developing countries (to which the India experience seems to be no exception), Braveman and Guasch, 1986, see most of the changes in institutional design as largely superficial, window dressing type rather than substantial. "the institutions have been perceived more like a welfare agency than a commercial undertaking. There seems to be little effort to integrate deposit taking activities or to generate saving mobilization-a vital activity for the long run success of a credit institution. No provisions were made to deal with non-compliance, or to implement a reasonable system of incentives to both lenders and borrowers to induce the desired objectives."

 

The major problems of the rural credit system thus evolved are as follows:

1. It has not produced desired results in terms of the direction, quantum and quality of the flow of credit.

2. It is afflicted by alarming high overdues, bad debts, loan defaults, unviability, low profitability, overburdening of staff, declining control and deteriorating customer services. It is estimated that the over dues of credit institutions have increased from Rs. 2,818 crores to Rs. 9,661 crores during 1983-93.

3.The complex tiering of funds through RBI-NABARD-Commercial Banks-State Cooperative Banks (SCBs)-District Co-operative Banks (DCBs)-Primary Agricultural Credit Societies (PACS), has tended to unduly increase the cost of banking.

4. Features of rural credit markets in developing countries may be understood as responses to the problems of adverse selection, moral hazard and enforcement. Imperfect information in this sense creates problems from the perspective of constrained Pareto efficiency. In Indian case too, information imperfactions have contributed to inefficiencies like high transaction costs and low recycling of credit.

5. From the institutional perspective, role of an appropriate institution as an enforcer and transmitter of incentives and motivator and inducer of saving is essential for development. The institutional design should serve to promote and facilitate functioning at the levels of both the leaders and borrowers. This factor seems to have been largely overlooked in the Indian case. Motivating to perform has not been given due importance.

6.Directed credit programmes and subsidized lending have badly affected viable functioning of credit disturbing units. The entire exercise has largely come to be characterized by tiering of funds from above to borrowers who often tale as a gift that need not be returned.