That village India predominantly depends on informal sources of credit, mostly the moneylenders, is well known. The prominence of moneylenders in rural India has been rising over the last three decades.
In the backdrop of the recent initiatives for financial inclusion in India, the low share of institutional credit agencies in rural India and the consequent rise in the dependence on the moneylenders is worrisome. To add to it, a recently published RBI report has recommended promoting the moneylenders, simply because they continue to operate despite the century-long efforts to find substitute for them and also as banks do not like to deal with marginal farmers. The report of the technical group (TG) for reviewing legislation on money lending (published on 24-07- 2007) recommends, inter alia, the creation of a new breed of moneylenders, to be known as accredited loan providers (ALP), whom the banks will lend to carry out independent money lending business. The TG also recommends that the advances made by the banks to the ALP for this purpose should form a part of their priority sector lending obligation. This, the TG opines, would give an added thrust to the initiatives towards financial inclusion through the formal lending institutions.
Financial inclusion, according to RBI deputy Governor Mr. V. Leeladhar, is delivery of banking services at affordable cost to the vast sections of disadvantaged and low income groups. Going by this definition, creation of ALP will be a blow rather than a boost to the objective of financial inclusion. While the efforts of financial inclusion should bring the ultimate borrower and the banks closer, creation of ALP will create an unnecessary layer of intermediary between the two, thus distancing them even further. Banking services in rural areas have diminished over the years — the rural bank branches have declined by 13.2% while the total number of bank branches in India grew by 14.6% between 1991 and 2006. Thus, rural India’s dependence on the moneylender is not by choice, but due to lack of alternatives. The money lending business is often exploitative involving usurious rates of interest and indulging in harsh and unethical recovery practices. Such practices may become institutionalized if moneylenders are promoted with bank loans.
There is no short cut to financial inclusion banks must spread to the villages, albeit with specialized products for the small borrowers if the objective of financial inclusion has to be achieved. Instead of encouraging banks to spread to the remote villages, RBI seems to be adopting a short cut and flawed route by creating ALP, thus making the objective of financial inclusion distant and remote.