“Even among borrowers, not the people in the world most famous for frugality, the number of the frugal and industrious surpasses considerably that of the prodigal and idle.” – Adam Smith, Wealth of Nations (2003 Bantum Classic Ed.),p.448
Information asymmetry is limiting the potential of rural banking system in India. We are currently in a situation where banks are equipped with better access to the borrower’s profile which includes details of land titles, assets, trade- credit linkages, fellow guarantees, and history of transactions and default. The borrowers on the other hand are generally less endowed with vital information like awareness about their credit limit, clarity on loan eligibility criteria, benefits of timely repayments and ways and means to tide over difficult times. One major policy implication of the findings of this paper is that information diffusion may have a critical role in unleashing the full potential of our banking system.
Financial Inclusion in rural India, poses a serious challenge to the policy makers. The theoretical foundation for understanding of the rural credit markets in developing countries is provided by information asymmetry prevailing in these markets. India is Information asymmetry deals with the study of decisions in transactions where one stake- holder has access to more or better information than the other. A large number of studies in the pre nineties on India and other developing countries have demonstrated that there is imperfect information in the rural credit markets where most of the institutional lenders were not endowed with the borrower’s credit history. Thus, the problem of screening of incentives and enforcement turned out to be one major contributory factor restricting the share of the institutional credit in these markets.
The situation has significantly changed since then with. India witnessing significant changes in the rural credit markets in the past two decades. Rural banks are now equipped to screen their customers with better access to the borrower’s credit profile which includes details of land titles, assets, trade- credit linkages, fellow guarantees, and the history of transactions and defaults The borrowers, in contrast, are not fully endowed with such vital information like awareness of their credit limits, clarity on loan eligibility criteria, benefits of timely repayments and ways and means to tide over difficult times. The problems of incentive and enforcement risks are being mitigated to a large extent with suitable repayment benefits and collateral requirements. On the other hand, banks’ efforts in diffusing credit related information has been clearly inadequate in reaching out to the potential borrowers. This information asymmetry from the perspective of the borrowers is likely to restrict the potential of our rural banking system.
Before delving upon policy issues concerning rural credit. Let us state some facts, where we have greater degree of consensus from the extent literature. The policy of extending institutional credit through bank branches has been reasonably successful .Bank credit had a share of 2.4 percent in rural household debt in 1971 which rose to 24.5 percent in 2002 as reported from various rounds of All India debt and Investment Survey (AIDIS). On the other hand the extent literature expresses policy concerns regarding insufficient credit extended by banks to the agriculture sector even though NPA loans were lower than in the industrial sector, Further there are genuine concerns among policy makers regarding rural poor carrying a heavier burden of debt than the rich as they have to increasing rely on non-institutional credit sources Banks on their own in the post liberalisation era are anticipating insufficient profits and huge transaction cost resort to credit rationing and consequently there are instances of bank staff rent seeking behaviour. The core policy issue concerning the policy makers is what could prompt greater institutional flow to rural India and more so to the poor people? The extent literature highlights information asymmetry about borrowers to be the main cause which limits the institutional flow to these markets. In contrast to the stated cause, bank branches in present times are better equipped with access to borrowers profile to mitigate concerns about adverse selection, moral hazards and enforcement. The logical issue then arises is what else is hampering these institutional flows to rural India.
To address these policy concerns critical information diffusion like their eligibility criteria, repayment benefits, and rescheduling of their loan installments during difficult times in an open and transparent manner by bank branches is vital. Banks could ensure this diffusion through appropriate human resource development policy and devising incentives in their pay structures.
This information diffusion by bank branches has a potential to trigger a chain reaction on the present bank customers with good repayment records to scale up their existing credit limits and motivate genuine prospective bank borrowers to avail bank credit, as loans to new customers would be sanctioned only after careful assessment of their land titles, assets, trade- credit linkages, fellow guarantees, and history of transactions and default. Later in stages a whole host of financial services and products could be offered to these bank customers with good track record. Such an exercise would not only induce financial discipline but financial inclusion of the rural masses. To illustrate it further firstly, as large of no- frill accounts are expected to be opened using UID number or MNEREGA job cards. This would facilitate financial inclusion of vast number of poor and marginalized sections in a phased manner. Before long banks would possess their transaction history and can offer credit and other financial products to new customers with financial discipline. Secondly, the recent cabinets green signal on establishment of the all women bank [Nirbhaya Bank] with INR 1000 crores corpus would be great enabler especially in regard to the expansion and deepening of the SHG-Bank linkages especially to the women without the collaterals, as we have concrete success evidence from the Grameen Bank in Bangladesh.
To conclude, the policy of extending institutional credit through bank branches has been reasonably successful both the social banking period and post liberalisation era. We need to build on the existing institutional structure which now has far greater degree of technological embedment that has considerably reduced both the transaction and operational cost of the banks. This has in other words enhanced the capabilities of bank branches to cater to large number of customers. Bank branches with appropriate information diffusion in open and transparent manner would realize their full potential in terms of enhanced rural institutional flow, easing of debt burden on the poor and much healthy balance sheets for the banks.
* Revised article on financial Inclusion in Rural India : Challenges Ahead published in Hindustan times dated: 22 August 2013
