The Financial Express

The state of rural credit market

| Updated: October 25, 2017 02:21:15

The state of rural credit market

Newspaper reports have it that flood-affected people, especially in 40 districts, are running to and fro in search of working capital to plant Aman paddy. Some of them are selling assets at lower prices and some are borrowing money from mohajons (moneylenders) at exorbitant interest rates. It is, perhaps, the time to look at the existing rural credit market.



There is no doubt that the rural credit market has undergone remarkable changes. But the market is not as inclusive as the concerned quarters may think, reveals a recent household-level survey. Improvement that has taken place over time can be gleaned from the following information:



In the period before 1980s (a) the informal market - moneylenders, traders and landowners, and friends and relatives  dominated the credit market; (b) only 14 per cent of rural households accessed loans from banks and cooperatives; the figure was 7.0 per cent for the functionally landless households compared to 21 per cent for those who owned more than 5.0 acres of land; and (c) two-thirds of the households, including 92 per cent from the landless group,  borrowed from the informal market.  



The percentage of rural households borrowing money increased from 38 per cent to 48 per cent during 1988-2014. The access to credit expanded more for the functionally landless households (38 per cent to 54 per cent) compared to the landowning households (40 per cent to 42 per cent), due to targeting of micro-credit to functionally landless households. Despite huge expansion of microfinance over the last two decades, almost half of the rural households still remain excluded from the financial market.


But noticeably, supply of institutional credit has expanded substantially over the 1988-2014 period mostly due to loans provided by non-governmental microfinance institutions (MFIs).  MFIs' share of total loan increased from 8.0 per cent in 1988 to 49 per cent in 2000 and further to 56 per cent in 2014. The growth in the average size of loan increased substantially during 2000-14 period compared to the 1988-2000 period, presumably due to faster growth of the economy.  MFIs have been conservative in increasing the size of loan compared to other sources (one-third compared to financial institutions). Banks now serve fewer members but increased the size of the loan by 10 per cent per year, compared to only 2.4 per cent by MFIs.  Even the informal sources give loan of larger amounts than the MFIs. The high-cost informal credit market has shrunk but still 23 per cent of households take loans from informal sources, accounting for one-third of total loans.



Among MFIs, as per coverage, the rank was as follows: Grameen Bank, ASA and BRAC both in 2008 and also in 2014.  Small non-governmental organisations (NGOs) have expanded the coverage much more than the big NGOs, accounting for 18 per cent of all borrowers in 2014 compared to 10 per cent in 2008.  Small NGOs still give loans of smaller sizes.



The initial target group of MFIs was households which own up to 0.5 acre (functionally landless group). It is a general perception that extreme land-scarce households do not access loans from the MFIs because they are scared to handle money. The survey data does not support this perception. These households comprise 45 per cent of all households, and account for more than 50 per cent of the borrowers. It appears that these households are better targeted by Grameen and ASA than by BRAC and small MFIs.

Non-farm households now account for 46 per cent of total households in the villages. The largest share of MFI loans go to these households, but more or less according to their weight. It is a common perception that tenants who do not have any land of their own are not reached even by NGO and MFIs. The survey data do not validate this perception.  A much larger proportion of tenant households are targeted by the MFIs than their weight.



Households engaged in business have more than proportionate share of MFI loans. Similar is the case for households engaged in wage labour for livelihood. The highly beneficiaries of MFI loans are, however, those engaged in transport operations. Households engaged in services are least engaged with MFIs.



In general, households perceive that their economic condition improved during 2000-2013 period. Among non-MFI members, 54 per cent reported that they are better off while 14 per cent reported that their condition has worsened. The net change is 40 per cent. 



In 2008, households taking multiple loans reported higher rate of improvement than those taking single loans. The proportion reporting deterioration in economic conditions was also lower among those taking multiple loans than those taking only one loan. In 2013 survey also, households taking multiple loans reported improvement at a higher rate, but the difference has narrowed down. A larger proportion of households taking multiple loans reported deterioration in economic conditions than those taking only one loan.

The writer is a former Professor of Economics at Jahangirnagar University.






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