Rural financial intermediation: Role of financial institutions in rural/tribal belt of Jharkhand

Abstract

Credit accessibility in Rural and Tribal areas of Jharkhand is very limited. Though the primary reason for this is the underdeveloped state of the financial system of these areas, there are several other factors which act as hurdles in gaining accessibility to the financial markets. We studied these factors by interacting with an expert group comprising of present and past Chief Secretaries, Deputy Commissioners, ministers, academicians, anthropologists and social workers. Research methodology included, in depth interviews of the experts, ethnographic study and various others observation techniques. The findings of our research are illustrated below. Some of the areas were totally isolated from the external financial systems until 50 years ago and are so underdeveloped that barter system still exists there and the concept of paper money is more or less nonexistent. Another hurdle is the usage of land as security for acquisition of loans. This is because; land in these areas is treated as a source of livelihood and not a commodity. This leads to a lot of hesitation on the part of a loan taker to mortgage his land in order to access credit. Besides this, the tribals observe collectivism in economic activities as well as in the ownership of land. The land available is not held by an individual but belongs to the village or clan. Individuals are allotted land for cultivation and earning a living, but do not have the right to transfer or alienate the land without the prior permission of the clan. This discrepancy in ownership of land makes it very difficult for financial institutions to keep land as a security. The collective nature of land occupancy also gives rise to faulty valuation methods which are unable to determine the monetary worth of land. This report tackles the issue of valuation of land and analyses the different methods of land valuation. In the end the usage of the Capm method is discovered as most suitable for land valuation. However, some issues still exist which needs to be tackled by primary research. In addition to the unique pattern of land holdings, there are several statutes which govern the land transferability and developmental policies in these areas. The features of three such acts were studied extensively and implications of the statutes given in the acts were explored. The Provisions of the Panchayats Extension to the Scheduled Areas Act 1996, the Scheduled Tribes (Recognition of Forest Rights) Bill 2005 and the Chotanagpur Tenancy Act 1908 emphasise upon the need for endogenous systems of governance and finance in tribal areas as opposed to conformance to exogenous systems. While these Acts have been very helpful in preserving the tribal traditional and customary laws as well as heritage, they have also proved to be a hindrance in acquisition of financial resources. The Chotanagpur Tenancy Act for example, restricts the transfer of tribal land to another tribal as well as nontribal until and unless there are very special situations. A lot of administrative obligations are needed to be fulfilled even though the transfer is validated. This acts as a deterrent for the financial institutes to grant finances against land mortgage because in case of a default, the amount will be difficult to realize due to non-transferability of the mortgaged land. Furthermore, the lease agreements on land are allowed only for a short duration of time during which the profits from the business might not be realised. This acts as hesitation on the part of entrepreneurs and businessmen to use tribal lands for generation of profits. This in turn devoid the tribal people of the opportunity to capitalize on their land. Although we initially had the opinion that the statutes which included the non-transferability of land should be modified and made more flexible in order to benefit the tribals, it came to light during the research that these statutes were the only means through which the rights of tribals on their land were protected and hence it is will not be beneficial to modify them in the current scenario. Based on these implications, solutions were drawn out for enhancing the monetization of land and increasing the capitalization of land through more appropriate lease agreement conditions. There are also issues with the amount of finances required by the tribals of Jharkhand. The primary source of income for the tribes is agriculture and forest produce. Since they have a history of sustenance by these sources, they don’t have need for large sums of hard cash. They usually borrow small sums of money in regular time intervals which are too small to obtain through bank loans. The roles of major financial institutions such as Nabard, Grameen Bank, Bank of India (Lead District Bank), Catholic Cooperative Bank along with secondary financers such as money lenders, dalals and non government institutions were studied in this context and their impact on the borrowing pattern of the tribals was observed. The study indicated that although there was huge availability of finance in these areas, apart from the land mortgage issues, factors such as fear of approaching authority, shyness from outside world, illiteracy and inadequacy in completing the forms required for obtaining the loans added to the reluctance of tribal people to approach the financial institutions and they preferred borrowing in small amount from the traditional money lenders or asked for assistance from dalals, which invariably resulted in exploitation of the people. Apart from this, we also had insight into the customary and traditional financial models operating in the tribal areas. We designed a financial model to overcome these shortcomings involving the inclusion of endogenous financial models in the mainstream of financial structure. We suggested that, the financial system should be made end-exogenous, where the tribal financial systems gain precedence over the state financial machinery and the role of the state is only to facilitate these systems. Finally, we made recommendations for filling up of infrastructural gaps, development of adequate irrigation facilities along with good storage and warehousing facilities and value added marketing services for monetization of the system. Methods to overcome language barriers and increase the involvement of people were also suggested. Increased productivity by removing the system of mono cropping, greater awareness about provisions such as crop insurance etc. and encouragement of alternate means of agriculture such as horticulture and floriculture was also suggested to enhance the flow of money in these areas.