1.

2 A Brief Review of the Literature and Research Gaps

The literature on interest rate subvention schemes for crop loans, especially pertaining to India, is rather
limited. Several studies, however, concentrate on the agrarian credit market in developing countries in
general and the Indian agricultural credit market in particular (see Bardhan, 1989; Bell and Srinivasan,
1989). Although there has been a decline in the share of rural population in the total over time, 60 per
cent of the population still lives in rural areas and depends mainly on agriculture, majority of which are
small or marginal farmers. For this group of farmers, facing land and liquidity constraints in the risky and
fluctuating production environment of Indian agriculture, credit remains a crucial input (Srinivasan,
1989). Amongst a few studies in the Indian context, Mitra et al. (1986) look at the causes of rural
indebtedness in the state of Assam. As the nature of rural indebtedness largely depends on the state of
the formal banking sector in rural areas, Ramachandran and Swaminathan (2001) examine the role of
the rural banking sector in India.
Historically, after the nationalisation of 14 major Indian banks on July 19, 1969, commercial banks were
entrusted with the task of meeting the credit needs of the hitherto neglected rural masses (Rajeev and
Mahesh, 2014). These banks were to provide credit to the neediest and reduce the role of informal
lenders in the market. Formal banking institutions, thus, became an important source of credit to the
agricultural sector, though it coexisted with the informal sector where interest rates were much higher
(Stiglitz and Hoff, 1990). There are however a number of problems with the formal sector as noted by
scholars.
It is frequently observed that formal credit is not available at the beginning of a crop cycle when it is
needed more (Gupta and Chauduri, 1997). Another serious problem in the formal credit market
mentioned by some authors is that the officials of the formal credit institutions, who are in charge of
disbursement of credit, often deliberately undertake dilatory tactics to seek bribes from farmers (ibid.;
Benjamin, 1981; Lele, 1981). Because of these problems, in spite of the considerable expansion of the
rural formal credit network, informal lenders still thrive in the agricultural credit market (NSSO, 2003).
This is true not only in India but also in other developing nations including Pakistan (Aleem, 1990),
Thailand (Siamwalla et al., 1990) and the African nations (Udry, 1990).
The informal credit market has also undergone certain changes in the recent past. In the changing
credit scenario, traditional landlords and moneylenders (Bhaduri, 1977 and Gangopadhyay and
Sengupta, 1987) are fading away and a new class of lenders, who are the dealers of working capital
have emerged (Rajeev and Deb, 2006). Due to their market power, they can charge a higher interest
rate and their loan contracts are adverse towards comparatively smaller borrowers (ibid.). Exploitation
by village moneylenders has been discussed by Basu (1989), who theoretically establishes that the rate
of interest charged by an informal lender is lower if the loan size is greater, which in turn puts small
borrowers are at a disadvantageous position. Unequal access to capital and hierarchies in an agrarian
system are illustrated in the study by Eswaran and Katowal (1990) as well.
Thus, one can see that while there are studies on Indian agricultural credit market, not many studies
have dealt directly with the issue of effectiveness of the subvention scheme, and most of these studies
are also dated. Additionally, while the incentives for prompt repayment are included to inculcate a habit
of timely repayment, it would be of interest to study whether the formation of such a habit is negatively
impacted by loan waiver schemes initiated by various state governments from time to time. Loan
waivers create the problem of moral hazard among farmers for repayment, as it rewards those who
have not repaid loans, providing incentives to farmers to avoid repayment until another loan waiver is
initiated. A field-based survey is required to look at the ground level scenario concerning some of these
pertinent issues