Credit complementary services can uplift rural lending: IIM-A study

Instead of just looking to offer direct credit, formal lending organisations, especially co-operatives, should look to offer credit as a package with complementary services, says a study conducted by the Indian Institute of Management, Ahmedabad (IIM-A).

Titled 'Sectoral Choice of Credit in Rural India', the study states that while formal credit is still at a nascent state for rural agrarian households, it can grow rapidly with the help of credit complementary services like insurance, input and output assistance as well as marketing assistance.

Coordinated by Samar Datta of Centre for Management of Agriculture at IIM-A, the study has been conducted by Debdatta Pal and Arnab Laha as part of the larger study titled 'Assessing Policy Interventions in Agri-Business and Allied Sector Credit versus Credit Plus Approach for Livelihood Promotion' sponsored by the Ministry of Agriculture, Government of India.

The study has covered about 600 rural households in 14 villages across Chhattisgarh, Maharashtra, West Bengal, Andhra Pradesh, Tamil Nadu and Gujarat.

The study finds that formal credit market in rural areas is sensitive to village characteristics along with applicant's household and production characteristics.

Even if government pushes for financial inclusion, access to formal credit is determined by profitability of farmer's individual projects as well as resource endowment to offer suitable collateral to the formal lender.

"This result may be relevant to policy makers in the present context when central bank of India is pushing the bankers to come out from traditional mortgage based lending and focus on financial inclusion," the study suggests as part of its findings.

The study found that of the 600 households surveyed, nearly 85 per cent of the households had availed at least one credit complementary services with the loan facility.  Citing the example of South Gujarat-based Amalsad Mandli, Pal said, "The co-operative society has attempted to offer formal credit alongwith complementary services which has resulted in almost 100 per cent repayment."

Further the study states that since credit is extended to the agricultural households who borrow on the basis of their land holding, the latter also acts as collateral from the lender's perspective.

"Better the irrigation facility, higher the profit potential of the farmer, whose loan application may positively be considered by the lender. Also, holding of mortgageable assets would act as a strong signal of creditworthiness. Households with higher acreage of cultivable land are expected to be a preferred group by the formal sector due to their profit potentiality. Also, ability to offer suitable marketable collateral may stand as strong signal of household's creditworthiness," as per the study.

While a minimum holding of one hectare of land has come out as a significant determinant to enter the credit market, household with a minimum of two hectare of land has evolved as a favourable choice of the formal creditors.