Notwithstanding the efforts of Indian banks to reach out to unbanked rural population, informal sources of credit, particularly moneylenders continue to cater to the needs of a large rural section, shows a Reserve Bank of India working paper. According to the paper, non-institutional credit formed 39% of the total debt of cultivators in 2002 out of which moneylenders had a share of 27%.
Although the share of money lenders has fallen from a peak of 70% in 1951, a resurgence in their lending was seen after 1981, the paper notes. From 1991 to 2002, the share of professional moneylenders in the loans to farmers doubled to 20% and that of commercial banks fell to 24% from 30%.
While the paper uses a decade old data from the last round of All-India Debt and Investment Survey, it points out to a persisting problem of banks not being able to cover un-banked areas.
In March, deputy governor KC Chakrabarty said in a speech that banking has not been made accessible and reliable to people. Indeed, the key reason for informal sources of credit to thrive has been the ease at which loans can be accessed and the absence of a regular repayment.
This easy access prompts farmers to approach moneylenders even though interest charged by these are high.
Further moneylenders take on risky borrowers while banks tend to avoid cases in agriculture lending where the risks are high. The persistence of money lenders shows the failure in the regional rural banks system.
Regional Rural Banks were established in 1976 as a low cost financial intermediation structure and several of these RRBs have run into huge losses. From as much as 196, RRBs have now reduced to just 60 in the country.
In 2002, as many as 15 states had shown a fall in the share of institutional agencies, the RBI paper notes.
The micro-finance institutions did service the needs of small borrowers but following the Andhra Pradesh episode even these institutions have now fallen behind.