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THE Reserve Bank of India has indeed made a categorical move in the matter of rural
credit. Its initiative in this respect has been outlined in its recent Monetary and Credit
Policy as under:

"In order to progress further in meeting the credit needs of the agriculture sector, it is
proposed to constitute an Advisory Committee to suggest short-and medium-term
measures to enhance credit flow to this sector. The Committee would, 

, look
into Nabard's role in the development of the sector; the present structure and
deployment of rural infrastructure development fund (RIDF); the role of RRBs; and the
incentive and attitudinal aspects of credit delivery. It would suggest appropriate
changes in the institutional and procedural arrangements for the smooth flow of credit
to agriculture. The committee is expected to help in capturing technological
developments in the cause of improving credit delivery."

For the task of the proposed committee, a look at the current trends and challenges in
rural credit:

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The current banking profile (as on March 31) reflects the low credit-deposit (CD) ratio
of 42 per cent and 35 per cent at the rural and semi-urban centres respectively
compared with 69.5 per cent in the urban centres (inclusive of metro centres) and 59.3
per cent at the national level. The CD ratios at the metro and the top 100 urban centres
are as high as 83 per cent and 74 per cent respectively. The exclusive CD ratios of
banks' rural and semi-urban branches were 37.2 per cent and 39.7 per cent
respectively at end-June 1969 (the time of nationalisation) and rose to 57.7 per cent
and 49.1 per cent at end-June 1981. Post-reforms, the exclusive CD ratios at the rural
and semi-urban branches almost plummeted to the levels prevalent during the period
of nationalisation of banks. Despite the widespread banking network now, these trends
indicate the continued migration of rural/semi-urban savings to urban/metro centres,
thereby causing a banking divide  digital/rural-urban divide (Table 1).

The growth of commercial banks' lending to agriculture and allied activities saw a
substantial decline in the 1990s compared to the 1980s. Agriculture's share in
scheduled commercial banks' total outstanding credit as on March 31, 2002, was only
Rs 64,008 crore (9.8 per cent). The declining penetration in rural banking during post-
reforms is given in Table 2.

Apart from lending less than the stipulated 18 per cent target, many scheduled
commercial banks are shying away from agriculture and priority sector lending by
resorting to the soft option of investing in the RIDF window of Nabard. As contributions
to the corpus of RIDF, Rs 16,145 crore was received by Nabard since 1995-96 from
scheduled commercial banks against their shortfall in priority sector/agricultural lending
during the preceding year. The outstandings of RIDF deposits at end-March 2003 stood
at Rs 12,159.23 crore.

Apart from the above, the 2001 Census figures give an alarming picture about the
usage of banking services among the Indian households in urban and rural areas
despite wide banking network in the country. Table 3 reinforces the conclusions about
the low level of banking usage among Indian households, in general (35.5 per cent),
and rural households, in particular (30.1 per cent), and also reflects the latent potential
demand for credit in rural segment.

 





The economy recorded 3.7 per cent growth in 2002-03 (5.6 per cent) against the
previous year. The deceleration in the performance was largely attributed to the
negative growth of 4.4 per cent in the agriculture sector. This steep downfall of GDP
brought to the surface the vulnerability of the economy to agricultural sector growth
despite its strengths on other macro-economic indicators/sectors. When the economy
achieved 5.6 per cent GDP growth in 2001-2002, the contribution of agriculture and
allied sectors was 5.7 per cent  "  2.6 per cent of the industrial sector. At the
same time, the Tenth Plan (2002-2007) has set an ambitious average GDP growth rate
of 8 per cent per annum. To achieve this, all the energies of the country need to be
focussed for the total revitalisation and revamping of the farm sector and the rural
financial institutions to ensure average 7 per cent sustainable growth per annum from
this sector in the next five years. Otherwise, the target of 8 per cent GDP growth for
the economy would remain a dream.

The farm sector, to a large extent, was excluded from general economic reforms
initiated in 1991. However, the reforms introduced in industry, finance, banking and
other sectors over the last decade have had a considerable impact on the farm sector.
The financial sector reforms have created a level-playing field between rural financial
institutions (RRBs and cooperatives) and other scheduled commercial banks in
treatment and in compliance of regulatory norms, but without any concomitant reforms
in agricultural sector.

The Task Force on Rural Credit for the Tenth Plan projected the institutional credit flow
to agriculture and allied activities to be Rs 7,36,570 crore during the period 2002-2007,
which is more than three times (320 per cent) the credit flow (Rs 2,29,853 crore)
during the Ninth Plan (1997-2002).

The farm sector is emerging as a part of the new economic order arising out of
globalisation and implementation of Agreement on Agriculture (AoA) under the World
Trade Organisation. At the Cancun round, the negotiations on agriculture may not have
arrived at the final stages of consensus between developed and developing countries. If
some agreement is reached at the WTO negotiations sooner than later, the agriculture
sector is poised for a radical transformation. To withstand the global competition,
enhanced productivity and sustainability of the sector has become imperative.

The Rural Non-Farm Sector (RNFS) has emerged an area of focus for creating
employment in the rural sector and to enable migration from the over-stretched farm
sector. The future strategy of rural credit institutions would have to include
strengthening the credit delivery system for increasing RNFS employment.
Development of entrepreneurs' skills, enhanced credit flow to women and other weaker
sections, supporting tiny, cottage and village industries, and coverage of wide variety of
service sector activities would require larger and wider role of rural financial institutions
in RNFS sector.
The growing role of microfinance through self-help groups (SHGs), especially of women,
in the unique process of socio-economic engineering has assumed a critical challenge.
The SHG movement has so far been mostly South-centric (constituting 64 per cent
share) but is yet to take off in other regions. Nabard's goal of reaching microfinance
services to one-third of the rural poor ² about 100 million ² through one million SHGs
by 2006-2007 poses many challenges for rural financial institutions.

The socio-economic conditions of a majority of the rural population continues to be the

cause of concern for policy-makers in this era of reforms and the WTO.

There are still more than 200 million people in rural areas who live below the poverty
line and for whom banking access is still not a reality and, despite a large bank
network, the critical gap in rural credit still exists.

Therefore, the requirement for strong and flexible structure of rural financial institutions
in rural and semi-urban segment need not be overemphasised.

The financial sector reforms without social and rural sensitivity would only aggravate
the complexities of agrarian sector reforms, which are yet to take shape. Therefore, it is
hoped that the Advisory Committee, being constituted by the RBI, will be a High-
Powered one (on the lines of the All India Rural Credit Survey Committee of 1954) and
take a comprehensive review of the current rural credit structure and suggest
innovative measures with a definite roadmap to meet the emerging needs/challenges in
rural credit.