Rural credit: Local lenders still rule the roost

Monday, January 16, 2006

Surinder Sud

Despite a perceptible increase in the flow of rural credit from institutional sources, the share of the informal sector, notably traditional moneylenders and traders, in farmers’ outstanding debts remain as high as 43.3 per cent at the all-India level.

This share is higher than the national average in several agriculturally progressive states, including Punjab, Andhra Pradesh, Tamil Nadu and Rajasthan.

The interest paid by farmers to money lenders and commission agents is generally between 18 per cent and 36 per cent, reveals a study on agriculture indebtedness in India, conducted by two agriculture economists of Punjab – RS Sidhu of the Ludhiana-based Punjab Agricultural University and Sucha Singh Gill of the Patiala-based Punjabi University.

The study has used the data of the 59th round of a survey conducted by the National Sample Survey Organisation released in 2005.

The study has concluded that deceleration in agriculture in the 1990s is one of the most important factors responsible for increasing indebtedness of farmers in the agriculturally advanced states.

Manipur tops the list of states having a high share of moneylenders in rural credit. This works out as much as 81.9 per cent there.

Money lenders’ share in some other states is like this: 52.1 per cent in Punjab, 48.86 per cent in Andhra Pradesh, 63.8 per cent in Rajasthan, 42.6 per cent in Tamil Nadu, 58.3 per cent in Bihar, and 42 per cent in West Bengal.

Farmers borrowing from non-institutional sources generally use their crop as collateral and commit to sell the output to lenders. The loans are also used to acquire inputs like seeds, fertilisers, insecticides and even consumer goods from the lenders.

The inter-linked transactions take place largely because the lenders are usually engaged in the marketing of farm inputs, consumer goods and agriculture output, along with money lending.

This has negative implications for agriculture development and cripples farmers’ capacity to return loans and come out of debt traps, the study report points out.

Source: (link opens in a new window)