Productivity of Rural Credit: A Review of Issues and some Recent Literature

1. Productivity of Rural Credit: A Review of Issues and some Recent Literature M S Sriram Indian Institute of Management Ahmedabad

2. Introduction • Policy Assumptions: • The most significant policy intervention has to be made in agriculture in rural India • Credit is important and has a causal relation with productivity – both in agriculture and non farm sectors • Opening up the supply of credit is desirable • Cost of credit is critical and needs to be regulated

3. Causality is elusive • Credit is a sub component of inputs that go into agriculture • Data on credit is available largely for the formal segment • Diversity across crops, regions and practices makes it difficult to undertake such an exercise on a nationwide basis

4. Recent Literature • Burgess and Pandey: • Opening of bank branches in unbanked areas [and thus increased supply of formal credit] has helped to reduce poverty. • Impacts on poverty might have come from non-agricultural sector • No evidence of elite capture with bank loans • agricultural loans disbursed across all land holding segments prior to 90s • Microfinance has not been successful in reaching real backward areas

5. Recent literature • Vaidyanathan: • Increased credit supply [indebtedness] may not lead to increase in agricultural productivity • Private capital formation without concurrent effect on economics of agriculture is worrying • If credit is not appropriately directed, it might lead to deep indebtedness and distress • Focus on public capital formation and infrastructure to address the problem of productivity

6. Recent literature • Rakesh Mohan: • Growth in formal agricultural credit has slowed down, but should not be a cause for worry • Credit to be seen more as a proportion of Agricultural GDP that as a proportion of overall supply of credit

7. Is there increase in value of output? Is credit the reason?

8. Is Agriculture Profitable? • Not very profitable in general • Profitability figures vary widely across states • Income from cultivation Rs.949 per month across the country • States like Jharkhand, Kerala, TN, WB and Rajasthan report greater income from wage than from agriculture • Average interest costs are less than 1% of cost of cultivation, never exceeding 3% in the country Source: NSSO 59th Round

9. Relative costs of inputs • Inputs that might not have an impact on productivity: • Labour 22%, lease rental 5%, other expenses 15% • Inputs that might impact productivity • Fertilisers 23%, Irrigation 12%, Seeds 16% [Total 51% of input costs] • Can increased credit significantly impact productivity?

10. Who needs Credit? Cultivators • Census data for India 31.7% - Rural 40% • Primary data from Dungarpur 25% [only BPL] –census 59% • Primary data from Dharmapuri 25% - census 39% • Primary data from W.Godavari 15% - census 12% • Backward regions have more cultivators • Financing subsistence agriculture is actually financing food security. • How are these loans serviced? Is there something else out there?

11. Agricultural Productivity: Other Issues • Changing technology – deskilling of farmer • Inputs moving out of farmer control • Seeds moving towards research intesity • Research and Extension services moving from public to private space • Pesticides being peddled as extended service of extension • No comprehensive risk mitigation products • Downside risks are unlimited, upside benefits seem to have a ceiling

12. Rural Credit: Beyond Agriculture • Supply side interventions: IRDP, SGSY, other “self employment” schemesMicrofinance: Supply side as it is design inducedMicrofinance: Does not sufficiently address diverse livelihood opportunities

13. Strategies for making Rural Credit Productive • Reduce Vulnerability • Understand pressure points [Anirudh Krishna] • RCL of Velugu Project • Maturing of SHGs [Alwer] • Diversification of livelihoods [Dharmapuri]

14. Strategies for making Rural Credit Productive • Increase opportunities through response to demand side patterns [better targeting] • Understand demand induced product attributes • Understand the space in which each player operates • Provide effective competition in these spaces

15. Desirable policy [non] interventions • Recognise that there are no easy-quickfix solutions • Initiate exercise to understand the cost of delivering rural financial service products in a scientific manner • possibly examine activity based costing • Remove formal and informal interest rate caps • Allow banks to “exploit” rural areas • they would be better than the current alternatives • Leave operational decisions like settlements, rescheduling and write offs as commercial decisions of the institutions • Continue to remove bottlenecks for microfinance to flourish • Continue to direct branch licencing towards rural areas • Continue to provide targets for rural lending

16. Thanks mssriram@iimahd.ernet.in www.iimahd.ernet.in/~mssriram

17. The SEWA Framework

18. Product Attributes

19. Purpose-Source Mapping