Role of Micro-Credit in Meeting the Credit Requirements of the Poor

Microcredit refers to credit and other financial services provided to the needy through self-help groups (SHGs) and non-governmental organizations (NGOs). By instilling saving habits among rural households, Self Help Groups play a critical role in satisfying the credit needs of the poor. Many farmers’ own funds are pooled together to cover the financial needs of the SHGs’ needy members. The banks have been linked to the members of these groups. In other words, SHGs allow economically disadvantaged individuals to develop strength by joining a group. In addition, financing through SHGs lowers transaction costs for both lenders and borrowers. The National Bank for Agricultural and Rural Development (NABARD) was instrumental in securing credit at preferential rates. Currently, more than seven lakh SHGs working in rural areas. Because of its informal credit delivery method and minimal legal requirements, SHGs’ programs are gaining popularity among small and marginal borrowers.

Moneylenders and dealers exploited small and marginal farmers and landless laborers during the time of independence by lending to them at excessive interest rates and manipulating their accounts to keep them in debt. After 1969, when India embraced social banking and a multiagency approach to fully satisfy the needs of rural credit, a huge shift occurred. Later, in 1982, the National Bank for Agriculture and Rural Development (NABARD) was established as an apex entity to coordinate the activities of all rural financial institutions. The Green Revolution foreshadowed huge changes in the credit system since it resulted in a diversification of rural credit portfolios toward production-oriented lending.

Credit plays a Significant Role in Rural Development:

The two most important criteria for rural development are finance and credit. Low income in rural areas frequently leads to a low rate of savings. It is extremely difficult for farmers to boost their production by investing in their farmland. Furthermore, the few banks that exist in rural areas prefer to lend to farmers with significant land holdings. Due to the difficulty in obtaining credit from banks, small and marginal farmers are the easy target for money lenders. Credit infusion is critical for the growth of the agricultural sector, which leads to rural economic development. The following points emphasize the relevance of credit in rural development:

• Credit aids farmers in commercializing their operations. To put it another way, commercial farming necessitates the use of credit. Because small and marginal farmers produce mainly for their own livelihood, they do not earn enough surpluses to reinvest in their fields, resulting in land degradation.
• Crops have a long gestation period between sowing and harvesting, farmers are granted credit for fulfilling their initial agricultural input needs, such as seeds and fertilizers.
• Credit allows farmers to break free from the cycle of poverty. Farmers require finances to meet both general and specific requirements. Credit will be used to meet these requirements.
• Agriculture has continually been a situation to the whims of the weather. Farmers are the ones who suffer the most in the absence of a decent monsoon or crop failure. Crop insurance and farm loans play an important role in preventing such tragedies.

Types of Agriculture Credit

There are three sorts of credit requirements in agriculture.

1. Short-term credit
2. Medium-term credit
3. Long-term credit

1. Short-term Credit: The period of short-term credit is less than 15 months. Farmers seek short-term credit to cover their agricultural operating capital needs. For example, they require short-term credit to purchase seeds, fertilizers, insecticides, bullocks, and other non-essential items. The short-term loan is returned once the next crop’s output is sold. The proportion of such loans has been high as compared to the medium and long-term credit. During 2010-2014, the increase in this type of loan was 14.77%.

2. Medium-term Credit: The period of medium-term credit ranges from 15 months to five years. Farmers demand medium-term loans for the purchase of cattle, tools, and watercourse improvements. The farmers’ moveable or immovable wealth is used as collateral for the loan.

3. Long-term Credit: Long-term credit is usually for more than 5 years. A long-term investment is required in any sector to establish lasting assets that provide profits over time. Long-term investments in agriculture include sinking wells, land leveling, fencing, and permanent improvements to land, as well as the purchase of large machineries such as a tractor and its attachments, such as trolleys, and the establishment of fruit orchards such as mango, cashew, coconut, sapota (chiku), orange, pomegranate, fig, guava, and so on. Fruit orchards, unlike other seasonal crops, do not produce any income for the first 4 to 5 years. As a result, the money spent in the first 4-5 years becomes a capital expense.

Sources of rural credit

Credits are divided into two categories. They are as follows:

1. Non- institutional sources
2. Institutional sources

Non- institutional sources:  

1. Money Lenders: Moneylenders have been an important source of farm financing since the beginning. Moneylenders provided a large share of agricultural credit (69.7% in 1951-52) and engaged in unethical practices such as account manipulation and charging a high rate of interest on their loans. As a result of all of these reasons, the share of money lenders in overall farm credit has dropped dramatically, from 69.7% in 1951-52 to 7% in 1995-96.
2. Landlords: In India, small and marginal farmers, as well as tenants, are borrowing money from landlords to cover their financial needs. This site has been following all of the shady dealings of money lenders, merchants, and others. This source’s contribution to rural leper cents rose from 3.3 percent in 1951-52 to 10% in 1995-96.
3. Traders and commission agents: Traders and commission agents advance loans to agriculturists for productive purposes before crop maturity at very low interest rates and charge a high commission.

Institutional sources

1. Co-operative credit societies: Co-operative credit societies are unquestionably the cheapest and greatest sources of rural financing in India. Active primary agricultural credit societies (PACS) in India span roughly 86 percent of Indian villages and account for nearly 36% of the country’s total rural population. In 1996, co-operatives accounted for over 40% of total agricultural loans, up from only 3% in 1951-52.
2. Commercial Banks: In the beginning, our country’s commercial banks will only play a little role in developing rural finance. However, following the nationalization of commercial banks, they began to provide financial assistance both directly and indirectly, and for both short and medium terms. Commercial banks’ direct advances were limited to Rs. 44 crore till 1969, but by March 2000, the total amount owed had risen to Rs. 22,854 crore.
3. Regional Rural Banks: Regional Rural Banks was founded in 1975 to supplement the rural credit provided by commercial banks and cooperatives. Since 1975, these regional rural banks have provided direct loans for productive purposes to small and marginal farmers, agricultural laborers, and rural artisans, among others. 196 RRBs lent almost Rs. 1500 crore to rural people annually until June 1996, with more than 90% of these loans going to the weaker class.

Conclusion

Traditional microcredit loans’ high fees restrict their efficacy as a poverty-fighting instrument. Borrowers who do not earn a rate of return that is at least equivalent to the interest rate may wind up worse off as a result of taking out the loans. According to the Center for Financial Inclusion’s latest study of microfinance borrowers in Ghana, more than one-third of those polled said they were having trouble repaying their loans. Microcredit providers have recently turned their attention away from growing the amount of lending capital available to address the difficulty of making microfinance loans more affordable.