The Eternal Challenge of Rural Credit

I first started thinking about the role of credit when I was doing a study on credit in tribal areas. For some time I had been planning to visit some very interior tribal habitations. So, I choose an interior village named   "Boddagandi" for the study. Before I discuss about credit in general, Let me discuss a bit about the specific scenario in the village. Its a small village on top a hill surrounded by forests all around. There are very few travel options because of the up hill ride and lack of proper road. So obviously there are accessibility issues when it come to the village. Since we are talking about credit I should mention that there is a bank which is 30 kms away from the village.Again because of lack of transport they will have to reach this bank by foot.

With that in context, let me outline some broad observations from the study. Not a single person in the village had taken a loan form the bank in the past 2-3 years because they were just too afraid of banks. No MFI's have ever reached this village. The average loan taken was around 5000 rupees. The most popular sources were SHG and GCC ( Girijan Co-operative Corporation).

Now let me jump out of this and talk about credit in general by taking the example of above village. Credit generally has four characteristics:
Accessibility, Adequacy, Timeliness and Affordability.

Adequacy: This characteristic is basically about weather the quantum amount of loan given is sufficient to meet the need. if the quantum is not sufficient then he/she will have to resort to informal lending channels which are very costly.In the above village the average loan was quite low at around 5000 which might actually not be a sufficient  amount to meet many of their needs. Also SERP, the oldest and probably the best of the SRLM's facilitated 10651 crores to its 442032 groups though its SHG bank linkage program. Thats a per group fiannce of  240995. Assuming a group has around 15 members then the per member finance would be around 16000 per annum which is no way sufficient to pull a person out of poverty. Some development expert told me sometime back that access to atleast a lakh of money is necessary to pull a family out of poverty. That shows how far we are yet to go in providing adequacy.  But this aspect is closely related to debt carrying capacity of the person. So the challenge is in finding the balance between the quantum of loan to meet the need and the debt carrying capacity of the person

Accessibility: This characteristic is basically about how easily accessible a credit source is. One of the many reasons for the success of MFI's was their accessibility. They would deliver the loan at your door step. Also the preference of informal lending channels to government lending channels is because of their accessibility. Government lending channels generally lack this aspect of credit. Though in the above village both sources of preferred credit are government sources that is because of the complete absence of other credit sources due to inaccessibility of the village

Affordability: Affordability refers to the cost of the loan. Generally government lending channels are easily affordable than informal lending channels. High cost of informal lending channels is one reasons for the perpetual debt crisis in rural areas. Informal lending channels make up for lack of affordability by being better at accessibility. In the above village both of them being government sources the cost of the loan was between 4% and 12%.

Timeliness: Timeliness refers to whether the credit is received  in time to meet the need. Not receiving credit on time is another reason for resorting to high cost debts from informal lending sources. This aspect is especially critical during emergencies like deaths. In the above village both the sources SHG and GCC take time time for delivering the credit. At least a couple of weeks to a month. Again government sources tend to be poor in this aspect compared to informal lending sources.

To sum it up informal lending sources are still prevalent because they are generally good at Accessibility, Adequacy an Timeliness. Government scores over informal lending sources when it comes to Affordability. So for government to be the preferred lending source it has to improve on those three characteristics. Some measures seem to be taken in this direction like the "Sthreenidhi" started by Andhra tries to tackle timeliness through technology. May be my next blog post on Sthreenidhi :).