Credit Plan to Revitalize Rural India

By: Tim O’Shea

Introduction

The rural population growth in India has been decreasing on average at a rate of 0.3 percent per decade since 1960, causing more and more entrepreneurs to migrate to big cities to find sustainable income. The Indian government is beginning to recognize a big need to increase rural production to further develop the economy. According to The World Bank database, since 1960 there has been a 15 percent decrease in rural population in India to 67 percent, and resulted in 0.64 percent annual growth for rural population in 2015. The decrease in rural population has been partially due to the volatility of the agriculture industry and the opportunity to make immediate cash in larger urban areas. This has resulted in 80 percent of the poor population in India living in rural areas; 62 percent of which is from seven states combined. The majority of agricultural expenses occur at the beginning of the season and the benefits are reaped at the very end, which is why local farmers will often not have enough money to make it through the entirety of the season. The linking of plant fruition to input requirements (animals, seed, etc.) remain uncalculated for farms in India causing them to overcompensate and waste money in certain areas. If farmers run out of money while still in season they will turn to local cash lenders to get them through the season. The current plan is to hook up over 85 million homes in poverty with up to $100,000 by 2019. The rural development ministry acknowledges the difficulty in starting and maintaining a farm, and wants to revitalize production or help farmers use their other skillsets to make money. The loans should be collateral-free and have subsidized interest rates to reward the use of national banks. With this plan there will be increased opportunities in the rural population of India from the increasing amount of loans being distributed.

Loan Supply and Repayment

Although microcredit has been around for centuries, there have been adjustments and changes made along the way to ensure maximum fairness for both parties involved. Theoretically, a bank gives a loan to a group of well-qualified farmers that are looking to get into the agriculture industry. If the farmers are able to cover variable and fixed costs, then they repay the bank with the amount they loaned out. If they are unable to repay the loan, they then are not allowed to take out loans in the future and suffer the social negligence from your partners because of being unable to repay the bank. The difficulty from this is the inability of knowing who are safe and risky borrowers to loan your money out to. The end goal being a provision of small scale financial services to poor borrowers for small businesses. The advantages from microcredit is the ability to deal with market failures and the joint liability aspect where communities are responsible for making sure everyone is doing their part. The rural development ministry headed by Amarjeet Sinha is using a subvention to cover 4 percent of the banks current 11 percent interest rates, causing the rural households to only have to cover 7 percent of the original loan interest rate. The hopes of increasing rural development have been laid out by the Indian government in an effort to “diversify livelihood opportunities,” said Sinha. In addition, the households in the backward districts (most underdeveloped) of India will get an additional 3 percent subvention which lowers their output requirements even more to cover the banks interest rates. The goal of the attempt by India is to lower costs and increase activity for all rural production through compatible incentives for local farmers.

The grouping together of people in poverty has been studied from the Tamil Nadu Panchayat Level Federation program and Telangana Stree Nidhi Cooperative which provide easy access of credit to groups in need. The Panchayat Level Federation formed Self Help Group’s (SHG) based off of different status levels to help give people a platform to share their experiences and increase transparency. However, problems still arise under these platforms when comparing the agricultural output statistics and the rural population growth. Rural population growth has decreased significantly and consistently over the last 20 years, but the total agriculture sector output in India has increased by over 20 percent in the last four years alone. This is because the State Bank of India in Tamil Nadu issues gold loans based off of the best looking loan portfolio. This gold loan is for more safe borrowers has a higher success rate than the traditional loan and ensures that the bank is automatically receiving gold in return, which makes it more appealing for the moneylender. As a result, 31.5 percent of the loans given out in India belong to 11,000 people within the country. Some people will use the loan amount to pay off a previous loan, further burying themselves in a debt crisis that they cannot solve. This shows huge amounts of disparity and unevenness of the loan process in India, which is why the credit program needs to be properly regulated when implemented for small scale rural businesses. This is accurate with our studies throughout the class and how the adverse selection model works in how risky match with other risky groups and safe like to match with safe.

Impact on households

With the increased amount of loans being given out to households, credit in India has been trending upward. The gold loan is creating a wider gap in agricultural production and not granting equal loans to all eligible parties. The goal of this micro-credit program is to reduce the poverty gap and dependence on local money lenders by promoting the efficient use of loans provided by the government. Non-affiliated moneylenders will come in and charge astronomical interest rates for farmers in need, usually to cover general upkeep charges of maintaining a farm or business because of the frontloaded costs. This subsidy from the government is aimed to be a reward like system for borrowing from the national bank and avoiding smaller micro lenders that will significantly upcharge the interest rates. Rural households in poverty will be able to borrow a smaller amount than they needed for less of a cost, which saves money in the short- and long-run for each household. Along with that, there have been expansions made in the dairy industry in an effort to decrease transportation costs and create more of a consistent revenue stream. The demand for dairy is fairly stagnant and can provide a good source of side income for farmers, so the market linkages between the two groups is huge. Credit in India will have to be monitored over the coming years because of the unpredictability of success rates. The rural population in India is a developing area that needs to be invested in to further develop and fully reach its potential. This is a groundbreaking proposition that could change the lives of the Indian economy forever because of the potential market size and the attempt to lower rural poverty numbers.

References:

Chitravanshi, Ruchika. “Government Planning an Easy Credit Scheme for Rural Households.” The Economic Times. Economic Times, 19 Apr. 2017. Web. 09 May 2017. <http://economictimes.indiatimes.com/news/economy/policy/government-planning-an-easy-credit-scheme-for-rural-households/articleshow/58250161.cms&gt;.

 

Schaffner, Julie. Development Economics. N.p.: Wiley, 2014. Print.

 

Janardhanan, Arun. “Tamil Nadu: Lion’s Share of Bank Loans against Gold, Villages Fall Prey toLoan Sharks.” LexisNexis® Academic. LexisNexis, 23 Mar. 2017. Web. 09 May 2017. http://www.lexisnexis.com/lnacui2api/results/docview/docview.do?docLinkInd=true&risb=21_T25937755023&format=GNBFI&sort=DATE%2CD%2CH&startDocNo=1&resultsUrlKey=29_T25937755016&cisb=22_T25937755015&treeMax=true&treeWidth=0&csi=354268&docNo=4

 

India’s Poverty Profile.” World Bank. N.p., n.d. Web. 09 May 2017.

<http://www.worldbank.org/en/news/infographic/2016/05/27/india-s-poverty-profile&gt;.

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