A study on microfinance institutions and money lenders in rural India

Abstract

The burden of indebtedness in rural India is great, and falls mainly on the households of rural working people. The exploitation of this group in the credit market is one of the most pervasive and persistent features of rural life in India, and despite major structural changes in credit institutions and forms of rural credit in the post-Independence period, Darling’s statement (1925), that “the Indian peasant is born in debt, lives in debt and dies in debt,” still remains true for the great majority of working households in the countryside. So, why do rural households need credit? The reasons are varied. They need it to meet shortterm requirements for working capital and for long-term investment in agriculture and other income-bearing activities. Agricultural and non-agricultural activities in rural areas are typically seasonal, and households need credit to smooth out seasonal fluctuations in earnings and expenditure. Rural households, particularly those vulnerable to what appear to others to be minor shocks with respect to income and expenditure, need credit as an insurance against risk. The Indian society has no free, compulsory and universal education or health care, and very few general social security programmes, so, rural households need credit for different types of consumption. These include expenditure on food, housing, health and education. Another important purpose of borrowing is to meet expenses for a variety of social obligations and rituals. If these credit needs of the poor are to be met, rural households need access to credit institutions that provide them a range of financial services, provide credit at reasonable rates of interest and provide loans that are unencumbered by extra-economic provisions and obligations. India’s rural poor are overwhelmingly dependent on agriculture as their primary source of income; the majority are marginal or small farmers, and the poorest households are landless. The financial needs of India’s rural poor reflect the volatile, uncertain, and irregular income streams and expenditure patterns of these households. The World Bank-NCAER Rural Finance Access Survey of 2003 indicates that while rural families are predominantly multiple-income households, their two main sources of income include the sale of agricultural products and wage labor. Irregular employment is the most important source of income from wage labor. For households with more than one source of income, agricultural income is the most important secondary source, with sales of farm produce and dairy products being the most prominent.