Daily Answer Writing
30 September 2021

Q) Absence timely formal credit available is one of the major determinants of rural distress. What are the constraints faced by the farmers in this regard?  Suggest lasting solutions overcome such challenges. (250 Words)

  • Source: The Indian Express - Page /The Editorial page - 12 - THE RURAL DEBT TRAP
  • GS 3: Agriculture


Approach Answer:

Introduction: Indebtedness is one of the major concerns for the Indian agriculture, which is at around 90%; Average debt of an household generally hovers around 1 Lakh per month. Above which about 70% of agricultural households spend more than they earn and 25% live below poverty line. This creates immense rural distress.


Constraints of Financial Resources:

    • High rates of Indebted ness: According to NSO's recent survey, incidence of indebtedness (IOI) the proportion of households having outstanding loans - is 35% in rural India 17.8% of rural households are indebted to institutional credit agencies, 10.2% to non-institutional agencies and 7% to both. 
    • Informal Credit: The share of debt from institutional credit agencies in total outstanding debt in rural India is 66% as compared to 87% in urban India. Most of such farmers have resorted to availing credit from even money lenders.
    • High rate of interest: Whereas the rate of interest charged on most of institutional debt is between 10 to 15%, whereas on non-institutional debt it falls between 20 to 25%.
    • Low Income: The NABARD All India Rural Financial Inclusion Survey (NAFIS) shows that average agriculture household income was a mere Rs 8,931 per month in 2016-17.
    • Dilution of Priority sector lending requirement: PSL guidelines were diluted & SIDBI was formed in 1990s, which allowed PSL target shortfall funds to be shared by both NABARD and SIDBI. Banks were allowed to lend to activities that were remotely connected with agriculture or  in agri-business, yet classify them as agricultural loans.
    • Inputs of modern agriculture are very expensive for small farmers.
    • Lack of financial inclusion/literacy: There are 42Crore Zero-balance accounts in India, which is still far less compared to Indian population. This reduces the access to Institutional credit.
    • Expenditure through debt: The top 10% rural households in terms of asset ownership spend almost two-thirds of their institutional debt and 40% of non-institutional debt on farm/non-farm business, whereas the bottom 10% spend half of their total debt on household expenditure.
    • Inequality due to collateral: The NSO report shows that the top 10% of asset-owning households have borrowed 80% of their total debt from institutional sources, whereas those in the bottom 50% borrowed around 53% of total debt from non-institutional sources. 
    • Post liberalization stagnation: Number of Rural branches have become stagnant in numbers as Opening branches in rural India is no longer profitable.
    • Dependency on Market intermediaries: Arhatias in Mandis have control over not only the markets but are also first in line to provide credit.


Solutions for ensuring credit:

    • Financial literacy: to increase the credit penetration, education about financial literacy seems to be important, which is also one of the main pillars of RBI's National Strategy for Financial Inclusion (NSFI).
    • Expand the outreach of Credit facilities System: by providing more number of bank branches in rural areas. Here RBI can take up  a better role through its branch authorization policy, making it compulsory for more number of branches to be open in rural areas.
    • Providing universal access to financial services: It must be compulsory as a matter of right to have a bank account which can be linked with an array of services including insurance scheme (PMJJBY, PMSBY, etc.) and Pension scheme (NPS, APY, etc.)
    • Easy processing of loans: Features like increased limit of Kisan Credit card for easy disbursal of loans and less stringent collateral requirement of the micro-loans.
    • Interest subvention on micro-agricultural loans: for those on the margins and may find it difficult to repay.
    • Covering each loan with crop insurance: So that any disaster do not impede the ability of the farmer to repay the loan or go bankrupt.
    • Issue Kisan Credit Cards to women farmers: 2016 Economic survey have shown that the number of women farmers is increasing over the years. Providing financial connection can reinforce this trend.


Conclusion: These solution shall be in the line with RBI's National Strategy for Financial Inclusion (NSFI) which aims for Universal Access to Financial Services  by creating an access to a formal financial service provider for every individual within a reasonable distance of 5 KM radius. Due to the Pandemic, the aim of 2020 for this has been delayed, which now should be resumed as soon as possible.

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