The financial distress in the rural sector, especially borne by the farmers and reflected in farmer suicides, is a matter of concern for the nation. The rural economy housing nearly two-thirds of the population is vital for the development of the nation as it not only supplies food for consumption but also provides a market for industrial output. The rural people, due to lack of awareness of financial instruments, tend to borrow from different sources and then come under financial distress, on crop failure. In the next few years, the rural economy is expected to witness a revolution in availability of financial instruments mainly because of three recent schemes announced by the government. First, the prime minister’s Jan Dhan Yojana with a provision for insurance. Second, the gold monetization scheme announced in the budget by the finance minister. Finally, the Micro Units Development Refinance Agency (MUDRA) Bank which will provide credit to small entrepreneurs.
These three schemes are expected to unleash the creative potential in the rural areas and provide easy finance to convert ideas into manufactured products for the markets. India truly seems to be at the cusp of rural revolution and high growth, but there is a need to coordinate and monitor the developments in the rural sector to ensure a smooth transition.
The Jan Dhan Yojana has been successful in opening nearly 9 crore accounts in the rural areas. The opening of bank accounts implies that many financial instruments, including insurance and pension schemes, would begin to be made available to the public. The direct benefit transfers which will operate through the banking system will also ensure regularity of flow of liquidity in rural households and therefore opportunities for investment. The banking system, which mainly will be the conduit to the flow of resources, can be expected to offer more financial instruments to retain and park these funds within the system. Similarly, the post offices, with their reach of 1,40,000 branches in rural areas, can also be expected to introduce new schemes to tap these resources.
In India, generally people prefer to invest in gold and as per conservative estimates, about 30 per cent of the official estimates of 21,000 tonnes of gold held by the public is for investment purposes. This gold is expected to get monetised easily and result in pumping purchasing power into the hands of the rural public.MUDRA Bank (MB), with a corpus of `20,000 crore, will provide credit of up to `10 lakh to small entrepreneurs. MB is offering development support across the entire spectrum of beneficiary segments like land transport; community, social and personal services; and food and textile products.
Thus, the rural market is expected to be flooded with financial instruments and institutions in the next few years. The key player in the rural market would be small banks, cooperative banks, regional rural banks, local area banks, commercial banks, micro-finance institutions, self-help groups, post offices and MB. The type of instruments that can be anticipated in the market are bank deposits of different varieties, small saving instruments through the post offices, gold bonds and new instruments that would be floated by the above mentioned institutions. In addition, informal market participants like money lenders, mandi merchants and chit funds would continue in rural markets.
Further, the government is envisaging reforms in the land market as well as computerising updating land records with the help of advanced technology. It is expected that in the next few years the ownership right on land would be firmly established, giving land a status of an easily tradeable asset. In a cash-starved rural economy, land, similar to gold, could be monetised. The financial institutions could consider reverse mortgage on land, adding still another financial instrument in the rural markets.
Thus, formal and informal financial institutions would be competing for collecting savings of rural people and offering credit. To ensure that the transition is not chaotic, adding further distress on the rural community, there is an increasing need for an institutional focus on the emerging complexities in the rural market. In this context probably, the National Bank for Agriculture and Rural Development (Nabard), with experience of three decades, could be tapped to ensure smooth development of rural financial markets. Nabard was constituted in 1982 to provide credit for the promotion of agriculture and other allied activities with a view to promoting integrated rural development. Technically, Nabard is the coordinating agency in relation to Union and state governments and other institutions at the national and state levels engaged in the development of rural areas. In effect, Nabard is an organisational device for providing undivided attention, forceful direction and pointed focus to problems related to credit and development in rural areas.
In view of regular problems in agriculture and rural areas, mainly due to drought, floods, unseasonal rains or other climatic changes, the rural economy and thereby the Indian economy suffers regularly. The government undertakes assessments of crop failure and other damage to announce relief measures which many a time are disputed by the political parties and farmer lobbies. The insurance companies are expected to provide relief but such relief is generally inadequate and delayed. The relief from the banking system dilutes banking standards and leads to moral hazards. Generally, there is widespread dissatisfaction across rural households on the relief measures and its computation. To ensure scientifically computed value for crop damage and assessment of loss to the rural community, it may be useful to involve Nabard in the exercise. Nabard can provide a more professionally computed value of the damage which would be credible for the political parties as well as the lobbies. This would also ensure that grim issues of economic losses in rural areas are not trivialised by political debates damaging the self-esteem of farmers. In view of the impending El Nino impact, strategic thinking and planning for the rural sector will help in inspiring confidence in rural households in weathering financial calamities.
charansingh@iimb.ernet.in