Credit as an input for agricultural production has not received the required marketing thrust so far. It has been dealt with as a public good which needs to be provided by the state only, because the market agencies are exploitative and as such do not attend to the genuine needs of the borrowers.
But, over time, it has become clear that there is a need to do innovative work in the field of credit. This could be, by way of marketing credit as an essential and powerful input in the form of financial services which facilitate the use of other agricultural inputs in the presence of increasing capitalisation of rural production processes, especially agricultural production.
Essentially, this means that the credit could be for consumption smoothening, human capital formation, income generation or any other directly or indirectly productive activity. In a good financial service, it is also important to provide the savings and investment service to supplement and sustain credit service.
We look at the nature of market for credit, problems in its efficient functioning, and ways to make it a worthwhile business proposition for both the lender as well as the borrower.
There is a vast market for credit which is mainly due to the lack of capital in farm sector and the high needs of capital for modernisation, besides consumption credit. About 2/3 of the credit needs in India is production credit and 1/3 consumption credit which is meant for illness or other household expenses in the lean season.
Therefore, there is very little need for market creation. What is required is the right product for an existing market which needs to be attended to in terms of delivery of services. This market is still largely untapped by institutional agencies. The hold of traditional moneylender and commission agents is very crucial in this market and there is frequent interlocking of credit market with other input and output markets.
Another feature of this market is the seasonal nature of demand. There is very high demand for credit in the sowing, as well as harvest periods. It is here, that both volumes as well as quality in terms of efficient delivery are important for the borrowers. An important element of the financial services-savings and insurance is almost absent in the rural financial market, with only savings being 5 per cent of the income.
The use of credit for purposes other than what it is meant for by the borrowers, is another hurdle in this market which creates many other problems like non-repayment, non-creditworthiness for future loans, and resource crunch for the entire system. The lack of viable projects and activities with good return is an added problem.
This is largely happening because, most of the time, there are no facilitating factors like irrigation, input markets, and the infrastructure which are required to make activities viable. The non-repayment of loans in the past due to politicisation has messed up the entire market for credit.
The market for credit can be divided into various segments depending on the type of activity and the duration of loan.
For example, there are agricultural term loans, crop loans, loans for allied activities, for non-farm sector either as working capital loans or term loans, and for housing, consumption, etc. The major segments in terms of volumes of credit are consumption loans, crop loans, and term loans for agriculture.
In India, there are many types of institutions for providing credit to the rural sector. These institutions include cooperatives, commercial banks, regional rural banks, and informal financial companies. Institutional credit accounts for 60 per cent of the total farm credit.
The institutional structure consists of 90,000 primary agricultural cooperative societies, 2,200 primary land development banks, about 13,000 RRB branches and 22,000 commercial bank branches. The cooperative structure accounts for more than 50 per cent of the total institutional credit.
The cooperatives have played a major role in providing short term credit as against commercial banks which have been major sources of investment credit in rural areas. Despite this significant peasants, many of these rural financial institutions suffer from non-viability, overdues, high operating costs and lack of professionalism.
The crucial aspects of demand for this product are timely availability, reasonable cost, adequate amount, and flexibility in the use of credit. If these needs of the market can be met, then there is no reason why there should not be significant change in the production scene in rural areas.
However, there are problems in delivering this benefit which are in the nature of the very product itself, its price, distribution, and promotion. By product, we mean that the product is either not available for a given purpose or not in adequate quantity. Price refers to the cost of credit including transaction cost incurred in obtaining a loan, besides the interest rate.
The distribution aspect lacks timeliness, and right mode and form of delivery. For example, loans being given in kind instead of cash and so on. As far as promotion is concerned, it is almost unheard of in the rural sector with respect to credit.
The credit is simply a function of supply in this sector, and does not take into account the demand realities. An inflexible repayment schedule, standardised loan unit for certain kind of projects, and indifferent attitude of the bankers are some of the other features of the conventional market for credit from the supply side.
To begin with, even in the existence of present system, there is need to do local assessment of creditworthiness and approval of loans; keeping in mind the local conditions and bringing in more responsibilities among the local employees of lending agencies. Further, the total credit needs of rural producers should be addressed and a composite cash credit limit can be given to avail of credit facility.
This will mean that they do not need to run for each and every loan. Further, there needs to be flexibility in the use of credit as the poor farmers keep shifting their activities depending on the local condition changes or small exigencies.
This is so as they are into poultry, goat and sheep rearing, animal husbandry which are prone to diseases, lack of inputs and are easily encashable. Since the purpose of credit is to facilitate their livelihoods, they should be free to use the loans across activities as long as they meet repayment schedule.
The agencies should offer liquid saving products to farmers with good return. This can make them give up saving in assets like gold, land, implements and livestock which are less encashable and prone to calamities. The loan should also be in cash only, and not in kind so that the farmer has freedom to choose sources of purchase and the use of loan money.
On the promotion side, there is need to give field publicity of loan schemes and procedures among farmers. Frequent marketing meets can be organised at the village level to make farmers aware of new schemes and benefits thereof. For security purposes, they should seek only credit amount equivalent security, preferably of crop and not land and leave terms and conditions of small loans (upto Rs. 10, 000) to local branches.
There is a need to encourage diversified activities in the non-farm sector. This is a potential sector and has more viable activities in it. For this sector, giving small amount and short period loans to create clientele can help in the medium and long run. Financing hi-tech agriculture is also an attractive business proposition which is not constrained by price factor.
The backward and forward linkages of such activities need to be assessed for evaluating their viability and growth, so that credit is repaid from the very same activity. Farmer training in new techniques for effective use of credit is an essential part of marketing of credit.
Unless the farming projects are viable, the repayment cannot be expected. For better recoveries, it is also important to promote habit of thrift among farmers and other marginalised groups. Frequent monitoring of projects can also help in better recoveries. The banks and lending agencies can participate in such infrastructure development projects which directly or indirectly help the banked projects.
Group lending through SHGs, and Mahila Mandals is now a tested and tried method of rural banking. This should be encouraged and used effectively. The other innovation in this field is that of Grameen Bank of Bangladesh which has achieved all the objectives of a successful lender through women SHGs, which have given high recovery rates for efficient delivery.
Similarly, Basix in India works through local agents who get 3 per cent of interest charged. The clients are charged 21 per cent interest if repaid in time, otherwise 24 per cent interest. There is diversified loan portfolio-farm, non-farm and small industry. It has lent Rs. 5 crore by now and with a recovery rate of 96 per cent.
The major attractions of this model are low transaction cost for the borrower, local contact, right security, and reasonable rate of interest. Equally good has been the case of SEWA in Gujarat where it works with women’s groups and has helped them start their own income generating projects.
There is a need to reduce overhead costs of lending by involving locals in the administration of loans and thereby externalising the credit checks with the group or community. Also, certain support services need to be provided which can include advice, technical assistance, and even other inputs.
Besides, women should be targeted for credit supply and involved in credit promotion for common property resources which would promote environment as well. Joint Promotion with other rural development and input marketing agencies can also be undertaken and the package can be delivered.
What is required, is a personalised approach to the marketing job. In this, local linkage building can help. Above all, the bankers need to build partnership with borrowers in the process of marketing credit.
From the policy point, there is a need to do away with service area approach and allow multiple options to borrowers. Also, the central banks should allow more liberal interest rate structure and flexibility to change it.
In the rural areas, it is important to evolve simple, special and easy to handle schemes for illiterate people. Marketing of services like credit also requires new culture of work and trained manpower besides aggressive selling and cost effective operations.