productivity by liaoxiuli

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									Productivity of Rural Credit:
A Review of Issues and some
     Recent Literature
              M S Sriram
   Indian Institute of Management
• Policy Assumptions:
  – The most significant policy intervention has
    to be made in agriculture in rural India
  – Credit is important and has a causal relation
    with productivity – both in agriculture and
    non farm sectors
  – Opening up the supply of credit is desirable
  – Cost of credit is critical and needs to be
         Causality is elusive
• Credit is a sub component of inputs that
  go into agriculture
• Data on credit is available largely for the
  formal segment
• Diversity across crops, regions and
  practices makes it difficult to undertake
  such an exercise on a nationwide basis
            Recent Literature
• Burgess and Pandey:
  – Opening of bank branches in unbanked areas [and
    thus increased supply of formal credit] has helped to
    reduce poverty.
  – Impacts on poverty might have come from non-
    agricultural sector
  – No evidence of elite capture with bank loans
     • agricultural loans disbursed across all land holding segments
       prior to 90s
  – Microfinance has not been successful in reaching real
    backward areas
            Recent literature
• Vaidyanathan:
  – Increased credit supply [indebtedness] may not lead
    to increase in agricultural productivity
  – Private capital formation without concurrent effect
    on economics of agriculture is worrying
  – If credit is not appropriately directed, it might lead
    to deep indebtedness and distress
  – Focus on public capital formation and infrastructure
    to address the problem of productivity
          Recent literature
• Rakesh Mohan:
  – Growth in formal agricultural credit has
    slowed down, but should not be a cause for
  – Credit to be seen more as a proportion of
    Agricultural GDP that as a proportion of
    overall supply of credit
          Is there increase in value of
          output? Is credit the reason?
            Gross Value of Output, Value of Input and Short-Term Credit
                            (Rs crore at current prices)

             Gross     Value     Short     Short Term Credit as a    Value of input as
            Value of     of      Term          percentage of         a percentage of
   Year     Output     Input     Credit      Inputs        Outputs       Outputs
1993-94       271839    55401       5424          9.79        2.00                20%
1998-99       488731    93416      10821         11.58        2.21                19%
1999-2000     514718 103170        12610         12.22        2.45                20%
2000-01       518693 107020        15442         14.43        2.98                21%
2001-02       562024 112194        18882         16.83        3.36                20%
2002-03       557035 114613        23324         20.35        4.19                21%
2003-04       635104 127365        31972         25.10        5.03                20%
      Source: National Account Statistics 2005, [reproduced from Mohan, 2006]
             Handbook of Statistics on the Indian Economy 2004-05, RBI.
     Is Agriculture Profitable?
• Not very profitable in general
• Profitability figures vary widely across states
• Income from cultivation Rs.949 per month
  across the country
• States like Jharkhand, Kerala, TN, WB and
  Rajasthan report greater income from wage
  than from agriculture
• Average interest costs are less than 1% of cost
  of cultivation, never exceeding 3% in the
                                    Source: NSSO 59th Round
      Relative costs of inputs
• Inputs that might not have an impact on
  – Labour 22%, lease rental 5%, other expenses
• Inputs that might impact productivity
  – Fertilisers 23%, Irrigation 12%, Seeds 16%
    [Total 51% of input costs]
• Can increased credit significantly impact
          Who needs Credit?
  – Census data for India 31.7% - Rural 40%
  – Primary data from Dungarpur 25% [only BPL] –census
  – Primary data from Dharmapuri 25% - census 39%
  – Primary data from W.Godavari 15% - census 12%
• Backward regions have more cultivators
  – Financing subsistence agriculture is actually
    financing food security.
  – How are these loans serviced? Is there something
    else out there?
       Agricultural Productivity:
              Other Issues
• Changing technology – deskilling of farmer
• Inputs moving out of farmer control
  – Seeds moving towards research intesity
  – Research and Extension services moving from public
    to private space
  – Pesticides being peddled as extended service of
  – No comprehensive risk mitigation products
  – Downside risks are unlimited, upside benefits seem
    to have a ceiling
   Rural Credit: Beyond Agriculture
                                        Household    Other     Total workers
                         Agricultural     Industry    Worker         (Main+
  Detail   Cultivators     Labourers      workers        s         Marginal)
Persons          40%            33%             4%      23%          100%
 Males           42%            27%             3%      27%          100%
Females          36%            43%             5%      15%          100%

•Supply side interventions: IRDP, SGSY, other “self
       employment” schemes
Microfinance: Supply side as it is design induced
Microfinance: Does not sufficiently address diverse
       livelihood opportunities
          Strategies for making
         Rural Credit Productive
• Reduce Vulnerability
  –   Understand pressure points [Anirudh Krishna]
  –   RCL of Velugu Project
  –   Maturing of SHGs [Alwer]
  –   Diversification of livelihoods [Dharmapuri]
        Strategies for making
       Rural Credit Productive
• Increase opportunities through response
  to demand side patterns [better
  – Understand demand induced product
  – Understand the space in which each player
  – Provide effective competition in these spaces
           Desirable policy [non]
• Recognise that there are no easy-quickfix solutions
• Initiate exercise to understand the cost of delivering
  rural financial service products in a scientific manner
   – possibly examine activity based costing
• Remove formal and informal interest rate caps
• Allow banks to “exploit” rural areas
   – they would be better than the current alternatives
• Leave operational decisions like settlements,
  rescheduling and write offs as commercial decisions of
  the institutions
• Continue to remove bottlenecks for microfinance to
• Continue to direct branch licencing towards rural areas
• Continue to provide targets for rural lending
The SEWA Framework
                 Product Attributes
Preference of Households on Attributes of Loan Products [HHs surveyed 1616]
                            Scores for attributes: 1= Very Important, 5=
Attributes for various         Irrelevant
   agencies                      1       2       3       4       5         Total
Easy Access                   153       43      29      14       4          243
Cost of loan                  157       64      12       5       5          243
Easy Access                   283       58       4       3       4          352
Cost of loan                  227       91      19      11       4          352
Easy Access                   393     189      152      64      37          835
Cost of loan                  156     153      224     187     115          835
           Purpose-Source Mapping
Pecking Order of Savings/Loan Outlets and Purpose of Savings/Borrowings
Informal                                                                 Formal

Cash       Semi     SHGs/         Semi Neighbourhood      “Outsiders”      –
Stashed/   Formal – formal             institutions – Co- Banks, companies,
Informal   Money                       ops/ Post offices chit funds, NBFCs
Emergen    Consumpt     Consumption,      Withdrawal for     Largely        asset
cy   and   ion,         social            social             purchase,
health     social       consumption,      consumption,       including    assets
needs      consumpt     asset purchase,   borrowing for      that    result    in
           ion, asset   Education         Working capital,   private     capital
           purchase                       asset purchase     formation

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