Rural Credit

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Rural Credit in 20th Century India
An Overview of History and Perspectives
Mihir Shah, Rangu Rao and P.S. Vijay Shankar
This brief overview of rural credit in 20th century India finds a remarkable continuity in the problems faced by the poor throughout this period. These include dependence on usurious moneylenders and the operation of a deeply exploitative grid of interlocked, imperfect markets. We articulate the theoretical and historical case for nationalisation of banks and provide evidence of its positive impact on rural credit and development. Certain excesses led to reforms unleashed in the 1990s. This did increase bank profitability but at the cost of the poor and of backward regions. While the MFI model of microfinance is unsustainable, the SHG-Bank Linkage approach can make a positive impact on security and empowerment of the disadvantaged. Much more than microfinance is needed to overcome the problems that have persisted over the last 100 years.

Introduction
This brief overview of rural credit in India begins in the 19th and ends in the 21st century but it is primarily concerned with the major episodes of the 20th century. The historical narrative pays close attention in each case to the perspectives that informed changes in policy and also documents the impact of these changes. We begin with a description of rural credit in the late-colonial period. The problems faced by India's villages display a remarkable continuity from this situation throughout the period being studied. Dependence on usurious moneylenders and the operation of a deeply exploitative grid of interlocked, imperfect markets afflicts the rural poor. After a review of the weak performance of cooperative credit institutions in India, we articulate the theoretical case for nationalisation of banks in 1969 and document its positive impact on rural credit and economic development. However, we also suggest that certain excesses in the two decades following nationalisation created a basis for the reforms unleashed in the 1990s. While these reforms have undoubtedly increased bank profitability, their impact on availability of affordable rural credit to the poor and India's backward regions, has been extremely adverse. The moneylenders have made a definite comeback. We appraise the attempt of the microfinance sector to address this crisis through an examination of its two main approaches. We suggest that while the Microfinance Institution (MFI) model is unsustainable and might actually end up worsening the situation for the poor, the Self-Help Group-Bank Linkage (SBL) approach has the potential to make a decisive impact on security

and empowerment of the most disadvantaged in the current context of farmers' suicides. It may also be critical in positively influencing profitability of banks in remote rural areas. Finally, we argue that much more than microfinance is needed to overcome the problems that have persisted over the last 100 years.

Late Colonial Period
Usurious moneylending practices are very well documented in many official reports from the colonial period. Perhaps the most important is the Central Banking Enquiry Committee (CBEC) report (1929) and its associated Provincial reports, of which the Madras Provincial Banking Enquiry Committee (MPBEC) report is regarded as a classic. It explains how the mechanisms of debt typically had a cumulative force: "Frequently the debt is not repaid in full and a part of the loan persists and becomes a pro-note debt. In the course of time, it may with a lucky year be paid off or it may become a mortgage debt. By the existence of this heavy persisting debt, the creditor takes the bulk of the produce and leaves the ryot unable to repay short-term loans. But equally, the short-term loan has produced long-term debt and there is a vicious circle. The ryot cannot clear his short-term debt because of the mortgage creditor and he cannot cultivate without borrowing because his crop goes largely to the...
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