Whither rural credit market?

Abdul Bayes | Published: April 08, 2014 00:00:00 | Updated: November 30, 2024 06:01:00

For the sake of simplicity, an expression of willingness on the part of a household to borrow money from any source would be taken as a proxy for demand for credit by that household. During a census by BRAC in 62 villages in 2013, and through a dichotomous question (Yes or No), households were asked about their interest in taking loan. In response to this question, three-fourths of the respondents reported willingness; only one-fourths signalled no interest.Â There appears to be little variations across farm size or tenurial class on this. Â
Again, since credit and extension should go hand in hand, an additional question was put before the households about their access to government extension services. In response to this question, roughly four-fifths reported no contact whatsoever with government extension workers in the year preceding the census; a small proportion reported to have met extension workers once or twice a year.
Arguably then, a huge proportion of households in rural areas, including the poorer ones, have been deprived of both credit and extension services. The observation is reinforced by the information that, roughly four-fifths of the respondents from pure tenant households have expressed their willingness to accessing credit, and they performed relatively worse in terms of accessing extension services. Â
That a large proportion of rural households aspire for an access to credit market is not a surprise. The reason lies in emerging changes in the rural inputs and output markets as well as in vastly expanding non-farm activities. For example, with the introduction of expensive HYV package in rice production, the demand for working capital has grown many folds. A move from subsistence to commercial agriculture has necessitated more financial capital that is difficult to meet from own savings. Second, and perhaps more importantly, growing mechanisation in some areas has compelled farmers 'cash in hand' to pay for hiring machines for cultivation or threshing. Particularly in recent years, cash payment for inputs has greased the seasonal demand for cash money. Third, many rural households need now credit to mortgage-in land or operate land under fixed-rent tenancy both of which require financial access. And finally, running trade/business, and transport, rearing livestock/poultry for income generation also need financial capital in excess of own savings.
While demand is there, supply doesn't seem to match demand as revealed by statistics that only 44 per cent of all rural households reported to have accessed credit in 2013. A survey on households in 62 villages in earlier decades put the ratio at 37 per cent.Â Appreciably then, accessibilityÂ to credit has increased over timeÂ but, sordidly,Â 60 per cent of the rural households still remain outside the reach of rural credit networks - be it formal or informal. This implies that provisions for cost-effective and inclusive financial facilities in rural areas that is heard about, doesn't tally with the realities on the ground. Of course, a little room for comfort awaits elsewhere, and it is the most discernible and dramatic change in the structure of rural credit market to benefit the poor borrowers.
Rural credit market in developing countries is generally dubbed as fragmented and dual. Fortunately for Bangladesh, the credit market could possibly grow over time by shedding some of its dual and fragmented features. One way towards this was the shift from non-institutional to institutional sources of credit. Metaphorically speaking, the former witnessed a sunset and the latter a sunrise over time.Â It would not be an exaggeration to say that the transformation in the credit market is a 'golden chapter' where roughly one-third of rural households in 2013 reported to have borrowed money (on average $352) from institutional sources.Â More importantly, the lion share of the total loans available to rural households now flows from institutional sources like banks and NGOs (non-governmental organizations).
However, the cloud gathers at the disaggregated level. Data show that only 2.0 per cent of households have accessed credit from commercial banks, and banks' share is only 13 per cent in total credit of households. This observation perhaps implies that credit from banks is yet to reach a respectable proportion of households in rural areas - an allegation looming large in the horizon for a pretty long time.Â This means that all said isn't all done particularly when pitted against commitments of successive governments in establishing cost-effective credit supply chain in rural areas. Â
Another eyesore is the distributional aspect of bank credit. More often than not, banks are alleged to bypass the poor in the delivery of credit. Although it is difficult to test this hypothesis with short and focused censusÂ questionnaire, results from three rounds of sample surveys conducted in 1988, 2000 and 2008Â lead almost to theÂ conclusion thatÂ bank credit went mostly to land-rich households who could provide collateral. There is another supportive evidence - the average size of the bank loan at $1,156 hints that only large and medium ones could access to lumpy loans.
However, this is undoubtedly an eyebrow-raising news but should be interpreted with some caution.Â Many commercial banks - without branches in rural areas - are reported to channel credit through NGOs working with rural households. Since census data were generated from household receiving loans from NGOs, the contribution of banks could have remained suppressed by some margin. Â
The dominant players in rural credit market are the NGOs - mostly operating under the umbrella of micro credit. Roughly one-third of all households borrow 60 per cent of their total institutional credit from them. Thus it indicates that NGOs, not banks, are the vanguard of channeling institutional credit in rural areas. The average size of the NGO-ledÂ Â loan at about $300, reminds us, first, that their main clients are functionally landless households with low absorptive capacity and second, the smaller loan size also points to the demand constraint that might have discouraged banks and other institutional arrangements to reach rural households, especially the poorer ones.
From Shakespeare's Merchant of Venice to Rabindranath Tagore's Duibigha Jomi - all depict heart-breaking episodes that non-institutional credit has allegedly created.Â This source has been a bane rather than boon for households. But one would be struck by the surprise that, even todayÂ roughly 12 per cent of rural households go for non-institutional credit to access about one-third of their total credit .Â The mind-boggling question is: why do households lean on these sources embracing an exorbitant rate of interest (say 10 per cent per month) and inter-linked transactions? Â
There could be many reasons behind thisÂ but we would pick up four important ones: (a) access to non-institutional sources of credit involves almost no transaction cost - readily available to serve as a friend in need; (b) the average sizeÂ of loan provided by this source is higher than that ofÂ the NGOs. Thus, households requiring a moderate sized capital without any transaction cost might prefer to knock at non-institutional doors; (c) a big chunk of non-institutional credit is provided by friends and relatives, but many of them don't charge any interest rate on the loaned money, and (d) backward areas with poor infrastructure, backward agriculture and rudimentary financial facilities are safe havens of these sources. Â
What is the size of the rural credit market? Taking the average size of loan at $411 for all rural households tend to suggest that the size of the rural credit market in 2013 was to the tune of about Tk 400 billion (40, 000 crores) which is 5.0 per cent of the gross domestic product (GDP).
The writer is Professor of economics at Jahangirnagar University.
Â abdulbayes@yahoo.com