In India sources of credit can be categorized into formal and informal sources | Microfinance | Poverty & Homelessness

In India sources of credit can be categorized into formal and informal sources.

Formal sources of credit consist of commercial banks, regional rural banks, cooperative credit societies etc. Informal sources of credit are friends and relatives, moneylenders etc. Today, India has over 32,000 rural branches of commercial banks and regional rural banks (RRBs), some 14,000 cooperative bank branches, 98,000 primary agricultural credit societies (PACS) (Basu and Srivastava, 2005). However, despite the vast network of banking and cooperative finance institutions the performance of the formal financial sector still fails to adequately reach out to, or reflect and respond to the requirements of the poor (Imai and Arun, 2008, Basu and Srivastava, 2005, Zeller and Sharma, 1998). In India despite the hype of high growth rate of the Indian economy still nearly 27 percent of the total population is poor (Government of India). If we consider the ¶exclusion· errors in estimating the poverty rate then the percentage is surely going to increase. It is also true that majority of the poor population is landless or marginal farmers or daily labour or petty selfemployed. Unarguably these people do need some sort of assistance in terms of credit to earn their day-to-day livelihood. Untill the 1990s financial services were facilitated by state sponsored institutions. The late 90·s saw the emergence of the microfinance institutions. The different organisations in this field can be classified as "Mainstream" and "Alternative" Micro Finance Institutions. National Agricultural Bank for Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), Housing Development Finance Corporation (HDFC), Commercial Banks, Regional Rural Banks (RRBs), the credit co-operative societies etc are some of the mainstream financial institutions involved in extending micro finance. These are the institutions, which have come up to fill the gap between the demand and supply for microfinance. Microfinance combines the safety and reliability of formal finance with the convenience and flexibility of informal finance. Many NGOs, either directly or indirectly through the SHGs, offer microfinance. These are Alternative form of micro finance institutions. The number of SHGs linked to banks has increased from just 500 in the early 1990s, to over 800,000 by 2004 (Basu and Srivastava, 2005). These MFIs have become increasingly important in societies like India mainly due to their better access to local knowledge and information. The formal credit institutions suffer from lengthy paper works, unavailability of easy access to loans etc (Basu and Srivastava, 2005, Zeller and Sharma, 1998). Also the structure and policies of formal sector loans tend to concentrate more on productive loans. It also put much emphasis on the credit worthiness of the borrower before sanctioning loans. But the success of MFIs in different countries shows that the poor basically need consumption loans. A rural marginal farmer might need loan in the lean season just to survive. Now it is very true that

people belong to the lowest income group spends most of the income on food. Food Policy Report. education in nutrition. and improve food expenditures and calorie intake than those who do not have access to credit (Zeller and Sharma. increase their incomes. Consumption and nutrition are important to a household·s ability to earn income. World Bank Policy Research Working Paper 3646. . School of Social Sciences. Zeller Manfred and Manohar Sharma (1998): ´Rural Finance and Poverty Alleviationµ.C.. Washington. Imai Katsushi and Thankom Arun (2008): ´Does Microfinance Reduce Poverty in India?µ. The University of Manchester.e. It has been found that mere extension of financial services to the poor households does not reduce poverty. availability of non-farm employment opportunities in surrounding area etc. IFPRI. health care etc. for what purpose the loan is used). Basu Priya and Pradeep Srivastava (2005): ´Scaling-up microfinance for India·s rural poorµ. EDP 0814. D. play important role in it (Imai and Arun. 1998). The purpose of the loan (i. So it has been argued that financial services must be complemented with other services (like improving access to basic literacy level.). the literacy level of the head. 2008). Households with improved access to credit are better able to adopt technology.

K. The immediate action plan of the Government was to concentrate on Cooperative Credit Societies. Swaminathan. Rural credit disbursement of the money lenders were characterized by high rate of interest with high exploitation of the poor. 2007).1 per cent in 1969. started.. Keeping in these objectives the banks were nationalized in 1969.. the share of banks in rural credit was meager. Swaminathan. and M. introduction of Regional Rural Banks (RRBs) and priority sector lending had the desired impact in stepping up the supply of credit to agriculture.) and certain disadvantaged groups (like dalits. In the colonial period the usurious money lenders were the main source of rural credit. 2007). In 1971. which was only 7. Integrated Rural Development Programme. Mihir et al. increased to 15. Gagan Bihari and D. cottage industry etc. Agriculture and allied activities and small-scale and cottage industries were identified as ´priorityµ sectors for credit delivery by the commercial banks. Advances to the countryside increased substantially but at the same time they were found to be biased towards some specific regions and classes (Ramachandran.. The scheme failed in creating income-bearing assets in the hands of rural poor. The Reserve Bank of India was established in 1935 and it was nationalized in 1949. the nationalisation of banks in 1969. labour employer and land lessor. V. 2004). a scheme for the creation of productive income-bearing assets among the poor through the allocation of subsidized credits. So inorder to benefit the ´weaker sectionµ of the society credit was started directing towards the intended segment of the society. 2005). Mihir et al. The moneylenders often combined the roles of crop buyer. The concept of mutuality between savings and credit functions. these cooperative societies had been seen to suffer from many shortcomings. But later. STs etc. Also the expansion of the . Rajsekhar. This multiple role of the moneylenders gave them immense power and upper hand over the borrowers (Shah. In the early 1980s employment generation and poverty alleviation were recognized as very important objectives in the Government policy. The spread of banking system during that time was very limited. So only after 1969.72 per cent of the total net bank credit by 1980 (Sahu. However. V. and M. traders and rich landlords accounted for more than 75 per cent of rural credit (Shah. some specific sectors (like agriculture. Also. The share of agriculture in the total credit provided by the formal banking sector. 2004). Mihir et al. the share of cooperatives in rural credit rise to 20 percent (Shah. the provision of credit in the countryside and to the needy was brought under a proper Government policy (Ramachandran. 2007).K. At the same time.The modern banking system in India started in the colonial period.) were found to be out of the purview of the banking sector. In the early 1950s it was found that the moneylenders. The IRDP strategy did lead to a significant transfer of funds to the rural poor. that is very important for the successful functioning of the cooperatives societies had been lacking in India.

Vijay Shankar (2007): ´Rural Credit in 20th Century India: Overview of History and Perspectivesµ.. Ramachandran. and M.4 per cent in 2006. Gagan Bihari and D. In contrast advances to large cultivators have risen in the same period (Ramachandran. (Shah.3 per cent in 1987 to 8. showed a great imbalance. Shah. Shah. 2007. V. Ramachandran. 1997 cited in Ramachandran. ILO.K. . and M.. and M. Rajsekhar (2005): ´Banking Sector Reform and Credit Flow to Indian Agricultureµ. 2004). 2001. V. Mihir et al. Mihir.. Geneva. 2007. V. The poor still depended on the informal sector in a big way (Shah. and M. 2007). Rangu Rao and P. Mihir et al. The profitability of public sector banks has improved following liberalisation. After 1990 mergers and swapping of rural branches became the norm. April 14. V. Swaminathan. 2005. The number of RRBs that rose to 196 by 1990 had fallen to 104 by 2006.K. Mihir et al. Swaminathan. Swaminathan (2004): ´Financial liberalization and Rural Banking in Indiaµ. In order to use the premature policies of globalization the reform process forgot the entire structure of social and development banking (Ramachandran. 2001. 2007). V.5 per cent in 1990 to 10. EPW.K. K.K. and M. S.. Paper presented at the International Conference on ´The Agrarian Constraint and Poverty Reduction: Macroeconomic Lessons for Africaµ. The phase of liberalization after 1991 came up with banking policy which would be guided more by the market thsn by the regulations set by the public authority. The share of rural deposits has also fallen steadily from its peak of 15. Ramachandran. Shah. Mihir et al. Swaminathan (2001): ´Does Informal Credit Provide Security?Rural Banking Policy in Indiaµ. The small cultivators were the worst affected by the post-1991 decline in credit to agriculture. Swaminathan). Addis Ababa. The share of agriculture in total bank credit has fallen from 19 per cent in 1990 to under 11 per cent in March 2005. being concentrated in the hands of the rich and the already developed regions. Sahu.But the share of rural credit has fallen continuously from the peak of 15. K. and M. The number of rural and semi urban bank branch offices steadily declined in the post reform period (Shah. V. Swaminathan. 2007).. EPW. Mihir et al. Total non-performing assets (NPAs) of public sector banks as a proportion of total advances have declined . even in the period of social banking. International Development Economics Associates (IDEAS).formal credit sector. 2007).8 per cent in 2006. But overall the phase between 1969 and 1990 saw unprecedented growth of commercial banking in terms of geographical spread and functional reach (Shetty. December 31.

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