Rural finance system and banking

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Rural finance system and banking

Rural Economy

1.1 Introduction

Even in recent time, third world countries were believers in industry based development. This policy of development benefited the urban dwellers relatively more because much of the industry grew up infrastructure developed cities and their suburbs. This uninterrupted policy did cause prosperity in rural areas as such rather the economic condition of the region was deteriorating gradually.

In the first half of the 20^th century communism was established in countries of Asia and East Europe. The rulers of the third world countries in which communism was not established became so fearful of rebellion of disgruntled rural people that they started to adopt some isolated rural development programs. However, all these development programs could not make any such contribution to improvement of economic condition of rural people because almost all the programs were taken for short period and for effect purpose. Moreover, all these projects failed miserably to achieve desired results as they were not implemented by keeping any connection with the overall development plans. After evaluating all these few isolated projects, many researchers found that benefit of these projects was enjoyed most by the rich moneylenders and landlords, in single word by people of opportunist class. The researchers also found despite some projects were able to increase the villager’s income, they were very insignificant compared to the immense size of rural population.

In such condition, the World Bank advised the third world countries to implement overall development planning based on rural area. The World Bank gave strong advice on implementation of overall development planning by coordinating various sectors of rural economy. This development strategy is called as multi-sectoral rural development strategy. In the multi-sectoral development strategy, production sector has been joined not only with service sector but also with infrastructure development sector. Production sector can be divided into poultry, livestock, fisheries, handicraft, small business etc. besides crop production. Other than these, health, family planning, education, communication, good provision of housing and entertainment may seem like to include in service sector for the time being. Actually in the final analysis, the development of all these sectors contributes greatly to the growth of productivity of developing financial sector. Similarly, development of infrastructure for example roads and highways, markets etc. in a planned way accelerates the development of production sector.

There is no doubt that the mentioned multi-sectoral development strategy will be able to improve the economic condition of rural people. However, implementation of all these projects will require huge amount of money which is impossible for rural people to supply. So, there requires invention of successful organizations that shall have abundant deposits and high number of branches present everywhere and above all of them shall be operated with clearly defined policy and strategy and by keeping achievable goals in front and above all by favorable well-trained workforce.

1.2 Characteristics of Rural Economy

Many similarities can be found among third world countries despite differences in their location and stages of development.

These general characteristics are given below:–

1. Vicious circle of poverty
2. Low rate of capital formation
3. Over reliance on agriculture
4. Short supply of entrepreneurs
5. Acute shortage of technicians
6. Scarcity of appropriate technology
7. Underdeveloped infrastructure
8. High rate of population growth
9. Scarcity of appropriate technology
10. High rate of inflation
11. Too much dependence of foreign aid
12. Impact of frequent natural disaster
13. Political instability
14. Low literacy rate
15. Unemployment problem
16. Underdeveloped and unorganized market mechanism
17. Underdeveloped and unorganized financial market
18. Non-progressive and unchanging social system
19. Backward looking women society
20. Ill-effects of village politics

1.3 Determinants of Development of Rural Economy

After analyzing the characteristics of underdeveloped rural economies, it is extremely important to know the determinants of overcoming the mentioned condition of rural economy.

The determinants are shown through the following diagram:–

Overall economic condition in the rural area is possible through appropriate improvement and exercise of the above mentioned quantitative and qualitative determinants.

1.4. The Problem of Maintaining Harmony in Rural Development Planning

According to Hores Bowels, adviser of FAO and eminent American rural economist, maintaining harmony on certain essential issues in rural development planning is pre-condition for rural development. The issues on which harmony needs to be maintained are the following:–

1. Consumption and saving
2. Production related investment versus social infrastructure development investment.
3. Limit in priority for agriculture and industry
4. Internal demand versus production for export
5. Setting limit for government and private investment.

The abovementioned essential issues of harmony are discussed briefly:–

a) Consumption and saving: Unnecessary consumption reduces amount of savings. Need for saving is undeniable for capital formation but production will fall if consumption is reduced by an unbelievable amount. This will indirectly reduce production and will become as obstacle for formation of savings and capital. Therefore, consumption level and consumable products should to be set so that production is not interrupted and sufficient saving is at hand to make investment.

b) Production related investment versus social infrastructure development investment: Some think investment in social infrastructure in wastage of money. They believe only in production related investment but without infrastructure necessary seeds, fertilizer, equipment, raw materials etc. it is difficult to procure in right time and to market them in best way and this affects the profitability of the produce greatly. Therefore, development of social infrastructure in definite amount and in appropriate way is extremely necessary that will decisively help productive investment to succeed.

c) Limit in priority for agriculture and industry: Agriculture and industry are both production related activities and dependent on another. If agriculture is neglected, importance of industry may be reduced due to shortage of necessary raw materials and need for sufficient local market for industry produces. This is because neglected agriculture forces reduction in income of rural people and this makes them incapable of consuming industrial goods despite having demand.

On the other side, industry can not progress in due rate if priority to the agriculture is given by keeping industry in negligence because necessary equipment, fertilizers, pesticides, medicine etc. are produced in industry. On the other hand, if rate of agricultural production remains unhindered still lack of marketing of agricultural product will hinder agricultural production remarkably.

Therefore, because agricultural and industrial development are dependent on one another, so investment limit in these should be set with importance.

d) Internal demand versus production for export: By exporting goods a country earns foreingn exchanges that help to import necessary machines and equipment, raw material and technology. However, only giving emphasis on export by ignoring domestic need will indirectly cause import of goods to meet domestic demand. In this situation, the earned foreign currency is used to pay foreign debts. In the final analysis, this type of export is proved as self-deceptive. On the other side, only production based on meeting internal demand will fail to modernize itself for lack of necessary foreign currency and is incapable of making production multifaceted.

e) Setting limit for private and government investment: Like, it is not desirable that all the sectors of development should be directed by the government; similarly private initiatives for all sectors are not eager. Therefore, infrastructure development is suitable for government sector and even parts of service sector can be developed under government supervision. For example, roads and highways, school- college, hospital, law and order situation are much more possible for the government to administer efficiently and neutrally. On the other side, the entire development sector should not be in the private sector. Highly profitable, monopolistic goods, goods important for public health, goods necessary for public security and state security are desirable to be produced under government supervision. Government can permit the private sector to produce depending that they pay lawful tax and duty duly and can change and expand production depending on disparity in use of factors of production. In the process of determining this sort of limit of government and private investment, amount of capital to be invested, supply of entrepreneurs, administrative efficiency, and honesty and patriotism of government employees are extremely important to consider.

Therefore it is extremely important to set the type and limit of government-private investment in various sector for the wider interest of the country by not neglecting the private sector rather by evaluating the capacity of entrepreneurs.

CREDIT IN RURAL ECONOMY

3.1 Introduction

Without adequate capital investment is a dream to rural development. For any kind of economic development planned capital investment is essential. Only capital investment is not the mean of rural development, there must be need development of social infrastructure. But this infrastructure development needs adequate investment. This investment may be private or public. From the experience it is seen that in capital and mixed economies government spend necessary capital for development of social infrastructure but for economic activities it spends less. On the other hand in social economy in both the factor govt. spends all the necessary investment.

Generally govt. invests for rural infrastructure development by its financial budget. On the other hand in this type of economy agriculture, industry, business etc, private investors invest by savings.

Rural people can collect money from three sources for economic activities. They are

1. Savings from past income

2. Sale revenue from present assets

3. Loan from other persons

Money collect from sale of assets do not bring additional money. Because is the transfer of resources from on surplus family to other surplus family. It is a temporary action. For this reason to develop the rural people and their life we need collection of deposit from rural, sub-town and town and invest this deposit effectively and efficiently.

3.2 Necessary to collect money other than family source

In the third world country like Bangladesh inevitable fund is very limited. Because their income is low that’s why savings is also low. To convert the ancient period agriculture method to modern method here also need adequate investment example: machinery, hybrid seeds, more fertilizer, water, and insecticide using we can more crop pre acre from before production. More than half of the landless people also live in rural area, for upgrading their life it would be essential to popular them the cottage business and the small business. To perform this we need adequate capital but here is also the short of capital.

Historically, Bangladeshi rural people suffering for necessary capital. There are only 5 to 10% people can save. The left 90% people depending on loan from others or sale of assets. In a survey in India and Bangladesh 80% land is cultivable or house making land and only one fourth of the land are at the hand of rural people. So we can say that above 60% people are living by borrowing money from others.

So for the development of the rural people there need adequate capital to upgrade the life of rural people

3.3 Rural banking in rural development

Like other loan term the rural loan also the same. Here also one party gives loan to another party by consuming less or sale of the assets. When one party need any asset or consumable think then other help this family. This help can be monetary or non monetary. So which goods, money or technology not in the hand of any rural people, they avail it with an agreement to back it is called the rural loan.

In which persons or institutions give money to purchase the above things and collect that money with the interest is called the bankers or Banks. For this which activities are taken by the bank is totally called the rural banking. But interest collect is depending on the bank.

3.4 Difference between rural loan and agricultural loan

Rural loan is wider than the agricultural loan which they can use for ant purposes. So rural loan can be 3 types and they are:

1. for productive agriculture, small cottage and small business
2. for consumption of goods or any type of arrangement such as marriage purpose
3. Infrastructure development such as road, school. Hospital mosque madrasha, culvert

On the other hand agricultural loan means for agricultural investment purpose investment in seeds, fertilizer, machinery, insecticides etc. with a view to increase the production.

Now the difference between rural loan and agricultural loan is given below:

Serial no.	Rural Loan	Serial no.	Agricultural Loan
01	Rural loan is a wider term than the agricultural loan. Rural loan is used for agricultural, industry and business purpose etc.	01	Agricultural loan is used only for agricultural purpose. Agricultural loan is used in animal husbandry, poultry, fishing etc.
02	Rural loan can be used in land based or non land based.	02	Agricultural loan is used land, pond and poultry.
03	Rural loan can be disburse in any time of the year	03	Agricultural loan disbursed only in agricultural season.
04	Mortgage can be land or any other property	04	Only land can be used as mortgage.
05	Landless or marginal farmer can be taken the rural loan.	05	Landless or marginal farmers can not take the agricultural loan
06	Since the rural loan is disbursed all the year that’s why the loan risk is low.	06	Since agricultural loan is given on the seasonal basis the risk is high because of natural calamities can be affected in agriculture.
07	Rural loan is not only used in small business but also can be used in cottage industry as a result much income can be generated.	07	But by taking agricultural loan is take time to income generating as a result the recovery of agricultural loan beginning lately.

3.5 Industry VS agriculture and rural loan

The concept of agricultural and rural loan is much more new concept than the industry loan. Because the importance of rural development is not heard by so many people before they heard the industry loan. Now the difference among Industry VS. Rural and agricultural loan is given below:

Serial no.	Industry loan	Serial no.	Agricultural Loan/rural loan
01	Industry loan is used only for the industry and based on the town and sub-town basis.	01	Rural loan is given for all the rural development activities based only the rural basis.
02	Industry loan is given on long term basis	02	This type of loan is given on medium and short term basis.
03	Most of the loan amount is used for collecting machinery product.	03	On the other hand this type of loan is used for purchasing input.
04	This loan amount is relatively large and the borrowers are comparatively few.	04	Agricultural and rural loan amount is relatively small but the borrower number is comparatively high.
05	This type of loan sanction is depending on the new entrepreneur come to this sector.	05	This type of loan is disbursed all around the year.
06	Interest rate is high	06	Interest rate is relatively low.
07	Without sufficient collateral the loan amount is not sanctioned.	07	Some of agricultural and rural loan is given without collateral.
08	Supplier of this type of loan is large financial institutions.	08	The source of this type of loan is almost the non-organizational institution.
09	The loan amount is determined by the capacity of the financial institution.	09	The amount is determined by the money needed of the borrower.
10	In case of industry loan there follow the certain method, project appraisal and valuation.	10	In case of this type of loan the project appraisal and valuation is not done.
11	This type of loan is renewable.	11	This type is not renewable.
12	Industry loan is given in domestic as well as foreign currency.	12	Agricultural and rural loan is always given in domestic currency.

Purposes of rural finance

In rural area the rural finance is executed because of increasing the income of the rural people as a result their allover financial condition will be improved. The purposes of the rural finance are given below:

1. Rural infrastructure development : Rural infrastructure can be divide in two parts

A) Economic infrastructure- communication, vehicles, electricity etc.

B) Social infrastructure- Mosque, madrasha, school, college, hospital etc.

Both type of infrastructure is developing by the finance from the govt. or private sources. To characterize this type of development up to this time is no option to take loan for this purpose.

2. Reduce the disparity between the town and the rural people: The roadmap of development of town is different from the road map of the rural. Because the infrastructure development in town where the govt. investment is too high. Overall the establish infrastructure, administration, nearness of market and other facilities is favorable in town and the people are chosen the town to perform their business activities.

For this reason the private and public investment in rural area is low. That’s why the financial disparity between the town and rural people is increasing. So, by giving loan to the rural people there is try to reduce the gap between the rural and town development

3. To increase the production of food and supply: Historically, the rural area in Bangladesh is suffering for sufficient food and other consumable goods. To reduce this deficit we need to increase the food production. By applying new method and using technology we can increase the food production but for this reason we need sufficient capital.

4. To increase the employment opportunity: From the statistics we see that the unemployment is increasing in rural area than the town area and after some time it would be intolerable. To create employment opportunity it is needed to develop the economic and social infrastructure and for this purpose there is need much more capital. Since the savings rate of rural people is low that’s why we need additional support from the private and the public sector to increase the employment opportunity. If we can create the employment opportunity then the income also be higher and their financial condition also be increased.

5. Women participation in economic development: From the statistics we see that only 10% of the total women participate actively in economic activities. When this rate would be high the rate of rural development also be high. So by organizing the organization and give the loan to the women it would be helpful to women participation in economic development. As a result the family income will be raise and the recognition of the women also be increase.

6. To reduce the economic disparity among the rural people: Earlier we said that the rate of savings and investment rate of rural people is below10%. The people who can invest more the economic upgrade them also increased. But the disparity between the rural rich and poor people. So here if the rural poor can not savings money and that’s why they can not be also investing and disparity also be increased.

7. Proper utilization of natural resources: Since in rural area there is not using the technology and the scarcity of skilled people the natural resources in rural areas are not using properly. To use these resources properly we need adequate investment in proper time. To increase the production by using this resources and technology we also need capital. Since in rural area the savings rate is low that’s why it is needed to invest in rural areas by giving loan to them.

3.7 Classification of Rural Credit

Basically rural credits are of two types; such as:

1. Consumable credit
2. Production credit

a. Consumable credit

The poor rural men and women always take loan in their hard time. The institutions do not sanction that loan for consume. So, the poor rural households must have to borrow from the jaminder and other non-institutional sources with high interest rates. The consumable credits are taken because of the following reasons:

I. for food

II. for purchasing cloths

III. for social ceremony (marriage, birth day, occasions, etc)

IV. to pay previous debt and

V. to build houses

b. Production credit

The credits that are used for the production purpose are divided into two types. Such as:

I. Agricultural credit

II. Non-agricultural credit

I. Agricultural credit

The credits that are sanctioned to operate the agricultural activities are known as agricultural credit. These agricultural credits are classified further into two categories.

· Crop credit

· Non-crop credit

Crop Credit

Crop credit is four types. Such as:

· Food crop credit

· Financial crop credit

· Credit for fruits garden

· Credit for storing

Non-crop Credit

The credits, that are sanctioned to perform the work which does not need any agricultural land or need very little agricultural land to perform the work, are known as non-crop credit. The credits are: milk industry, poultry firms, fish cultivation, cattle fattening, etc.

Position of credit in the rural economy

Classification of Rural Credit

	Rural Credit

II. Non-agricultural credit

The development non-agricultural credit is the recent addition in the rural economy. As the numbers of landless and marginalized farmers are increasing dangerously, the domestic and international economists give emphasis on the non-agricultural credit and make the investment in a bulk figure. The non-agricultural financial items on which the credits are sanctioned are:

a. Handicrafts industry

b. Small industry

c. Village business and

d. Financial services

3.8 More Classification of Rural Credit

The rural credits are further classified in lieu of the previous classifications. Such as:

Rural Credit

Investment Credit Current Production Credit

Agricultural Credit Non-agricultural Credit

Building and Rehabilitation Building Credit Machinery Credit

Development Credit

Machinery Credit

Investment purpose agricultural credit

Normally the investment purpose agricultural credit amount is bigger than production purpose credit. Agricultural credit covers forming agricultural firm, other houses building, store houses building, construction and rehabilitation, etc credit. On the other hand, making land plain, dig pond, preparing sewerage canal, etc fall into development agricultural credit. Nevertheless, tractor, power pump, harvest, etc, credit is under agricultural machinery credit.

3.9 Classification on the basis of Maturity

Based on the maturity, the rural credit is three types. Such as:

• Short-term
• Mid-term
• Long-term

The short-term credit is for 3 to 18 months. In case of cottage industry and rural business, the short-term credit may be for few days and last for a year. Only for the cases of agricultural, the farmers get their crop in 18 months and that’s why the credit is for 18 months in this case. The mid-term credit duration ranges from one year to five year. And the long-term credit ranges from 5 years to 20 years.

3.10 Classification of Rural Credit on the basis of Collateral

The rural credit is of two types on the basis of their collateral. Like:

Collateral Basis Rural Credit

With Collateral Without Collateral

Partly Collateral Fully Collateral

Pledge Credit Extra Collateral Credit Credit by Individual’s Assurance

Without Collateral Rural Credit

Sometimes the banks sanction credit on the basis of the individuals’ goodwill. On the other hand, the non-institutional debtors provide loan to their relatives without any collateral.

With Collateral Rural Credit

If the collateral value is less than the value of the loan, then it is called partly collateral rural credit. On the other hand, if the collateral value is at least equal or more than the loan value, then this is called fully collateral rural credit.

Individual’s Assurance

Bank sanctions credit on the recommendation of the prominent person without taking any collateral. But, if the creditor fails to repay the loan then the guarantor personally repays the loan by selling his/her property or from the personal income. So, the loan granting institutions or banks first investigate the property of the guarantor to minimize the risk of failure to repay. Also, the banks assured that the previous transactions of the guarantor are satisfactory or not.

3.11 Credit on the basis on the Creditors’ type

The credits are the following types on the basis of the creditor:

• Small business credit
• Small entrepreneurs credit
• Farmers’ loan
• Marginal farmers’ loan
• Landless credit
• Self involved credit

3.12 Current and Fixed Rural Credit

The current rural credits are taken to fulfill the demand of production raw materials or pay the wages of the labor. On the other hand, the rural individual takes loan to make equipment development, construction, machinery, etc.

3.13 Extra Classification of Rural Credit on the basis of Uses

The loans taken for the uses purposes of agriculture, industry or business are named separately. Some of them are mentioned below:

• Consumable credit

Food credit

Houses credit

• Seeds loan
• Fertilizer loan
• Vehicles credit
• Machinery credit
• Pond credit
• Land development credit
• Fish credit, etc

3.14 Classification of Rural Credit Basis on the Sources

The rural credits are classified below based on their sources:

Rural Credit

3.15 Demand and Supply of Rural Credit

It is necessary to have the similar knowledge about the demand and supply of rural credit as the other goods demand and supply. The supply should be as per the demand. If the supply of rural credit is more or less than the demand of rural credit then there would be a mismatch in the rural economy. So, it should be the goal of the planned economy of balanced demand and supply of rural credit. The indicators of demand and supply are discussed below:

3.15.1 Demand of rural credit

It should be aim of developing country to fulfill the demand and creating extra demand of rural credit. The demand indicators are:

1. Consumers constructional power
2. Possibility of increasing the production
3. Production procedure
4. Crop/production mixture
5. Use of innovational power
6. Use of developed technology
7. Limit of machineries
8. Change of seasons
9. Required skills and labor expend
10. Loan expenditure
11. Collateral for the loan
12. The consumers behavior
13. Government’s behavior on providing loan in rural economy
14. Loan payment procedure
15. The risk of using credit
16. Monitoring the uses of credit
17. The behavior and attitude of the credit granting institution’s employees
18. Position of developed market
19. Expand of infrastructure development
20. Receiving of raw materials in production
21. Difference between application for loan and time of receiving the loan
22. Number of economical market and their position, capital and skill
23. Probability of getting subsidy from the government
24. Skill and training of the loan users

3.15.2 Supply of rural credit

The supply of rural credit depends of the following factors based on the economic activities and sources of credit:

1. The government’s attitude to develop the rural peoples’ economic condition;
2. The central bank’s attitude and organizational skill to provide the rural credit;
3. The monetary and income tax policy on rural economy;
4. The number of credit providing individuals or institutions;
5. The credit providing firms’ loan policy;
6. The fund availability of the credit providing firms;
7. The rural deposit availability of the loan providing firms;
8. The attitude of the central bank to re-financing the rural people;
9. The flexibility of the loan and the loan expenditure;
10. The rate of interest of the loan;

But there are some determinants that have special impact on demand of rural credit. Examples of some determinants given below:

A) In case of growing crops

I. Duration of irrigation;

II. Area of cultivable land;

III. Nature of land fertility;

IV. Nature of density of farming crop;

V. Potentiality of adopting associate profession;

VI. Extent of promptness of government agriculture employee.

B) In case of cottage and handicraft industry

I. Quantity of Supply of entrepreneur;

II. Certainty of market for produced goods;

III. Condition of supply of skilled technicians;

IV. Potentiality of export market for produced goods.

C) In case o cattle rearing

I. Quantity of entrepreneurs in cattle rearing;

II. Nature of demand of cattle and animal milk;

III. Nature of demand of cattle and animal meat;

IV. Potentiality of gathering high-class cattle and animal assets etc.

3.15.2 SUPPLY OF RURAL CREDIT

Supply of rural credit depend upon the following matters on the basis of economic activities or sources of credit:

1) Attitude of government in developing financial condition of rural people;

2) Organizational Skillness and attitude of central bank in supplying rural credit;

3) Government monetary and fiscal policy for rural economy;

4) Extent and quantity of institution or individual involved with supply of credit;

5) Credit policy and skillness of institutions in supplying credit;

6) Adequacy of fund of institutions involved with supply of credit;

7) Adequacy of collected rural deposit by the institutions of credit provider;

8) Attitude/adequacy of refinancing by the central bank;

9) Disparity of cost for credit providing and operation of business;

10) Interest rate paid on credit;

11) Intensity of risk in providing loan;

12) Potentiality of rural savings for present and future;

13) Method of supplying raw materials, seeds, fertilizer, and other equipments to use credit;

14) Attitude of borrower for payment of loan;

15) Economic, political and social stability;

16) Limit of decentralization of power for providing credit in lower level

17) Training and attitude of employees engaged in institutions that provide loan.

3.16 quantity of demand for rural credit in Bangladesh

In Bangladesh no comprehensive scientific survey for measuring demand of rural credit in rural area had been occurred until today. But there were some endeavor for estimation. Some estimation of rural credit of those endeavor has been given below:

(Tk. In Crore)

Schedule of rural credit that was estimated in different time

Source Year of Estimation Quantity of Estimated Credit

1. Credit Explorer Committee 1959 25% of agricultural production

2. Pakistan Africulture Enumeration 1960 142.80

Report

3. Mr. Ershad Khan, Pakistan 1963,

Institution of economic development 1963 185.00

4. Mirza Shahjahan, Institution of

Economic Research, Dhaka university 1967 230.00

5. Committee of Agriculture Credit 1970 182.00

6. Bangladesh Planning Commission 1977-78 Agriculture 365.0}

(Last year of 5th annual planning) Non-agriculture 547.5}

7. Bangladesh Planning Commission 430.00

(Biennial Planning)

8. Bangladesh Planning Commission 1979-80 491.00

(Biennial Planning)

9. Bangladesh Planning Commission 1990 8000.00

(Last Year, 3^rd 5^th Annual Planning)

Aforementioned three estimated demand of agricultural credit and supply of credit deficit has been given below:

Year Estimated Real institutional Deficit Deficit relative to need

Demand supply (%)

1977-78 365 138 277 75.89

1978-79 430 153 277 64.42

1979-80 491 260 231 47.05

*Bangladesh Bank, Department of Agricultural loan

In above mentioned loan deficit only total supply of agriculture loan has been shown against demand of agriculture loan. This deficit was 76% in the year of 1977-78, which decreased to 50% in the year of 1979-80. Knowledge on nature of deficit rural credit cannot be acquired from above explanation. It is very difficult to be known about the condition of such real deficit without an extensive scientific survey.

3.17 Estimated Amount of Rural Credit Deficit In Bangladesh

It is mentioned above that no extensive survey had been done today for measuring demand, supply and deficit of rural credit. But it is undeniable that institutional loan system supply very little amount of demand of loan needed. It is known from 1956 Dhaka University Socio-economic Survey that only 6.69% demand of total credit need was settled by institutional loan. It was 10% according to 1960 Pakistan agriculture survey, 14% according to cooperative registrar survey. Agriculture loan committee, formed by government in 1969, estimated sources of institutional loan as 14.86%. Among the above mentioned four sources the letter three besides the first one was estimated by government. In an unbearable situation the author himself tried an endevour for estimation of total deficit of rural credit. In India there were some extensive survey about the portion of input that comes from investor’s own savings and the portion that comes from credit. The deficit (From1972-73 to 1978-79) found by the author by relating the portion of ratio with the national rural production collected from different sectors has been given below:

Schedule for deficit of Rural Credit (From1972-73 to 1978-79):

(Amount in Crore)

Year Estimared quantity Supply of institutional Percentage of estimated

of Rural Credit rural credit Deficit

1972-73 716 33 96.39

1973-74 1017 22 97.84

1974-75 2111 30 98.58

1975-76 1517 36 97.63

1976-77 1613 85 94.63

1977-78 2022 138 93.18

1978-79 2278 153 93.28

Source4s: Khan A. R. “Institutional Finance in Rural Development—a comparative observation of India and Bangladesh” Thesis taken for P. hd. Degree in University of Puna, 1983 Page no. 276.

It is realized from mentioned information that at the beginning of the decade of 80 more than 90% of total demand of credit remained as deficit. It will be possible to change the expected financial position of the rural people if the deficit of rural credit is eliminated as soon as possible. Otherwise the 5^th annual planning or government declaration will remain as fake word in the name of rural development.

3.18 COMPETENCY OF GETTING LOAN OF RURAL CREDIT SEERKE

It is a conventional technique of institutional loaner to justify the competency of getting credit. It is not right that any individual or society will get loan against their application.

Loan is provided to those people who are abiding by the disciplines and regulations of credit management. On the other hand non-organizational loaner also justify competency of loan seeker directly or indirectly or explicitly or inexplicitly. But non-institutional loaner emphasis on security of recovery of loan amount with interest. But institutional loan provider also considers the benefits of credit seeker besides appropriate conditions.

It is worth mentioned that as commercial or industrial loan seeker are rich, educated and aware about knowledge of business competency of getting loan of those people is measured tightly. Measurement of credit competency of those people is very important as each of them apply for a lump sum amount of loan which is equivalent to or more than one thousand rural credit applicant.

However, the factors considered in granting credit by the institutions that worked in rural area are as follows:

1) Objective of loan

2) Stability of loan applicant in rural area

3) Competency and good reputation of loan applicant

4) Capability of giving collateral for the loan amount that has applied for

5) Potentiality of financial benefits of loan applicant by using loan

Discussions of above points are given below:

a) Purpose of the credit proposal:

In rural areas the credit institutions do not give loan for all purposes, especially for consumption purpose. On the other hand, loans are not sanctioned for all financial transactions, such as loan for: loan sanctioning to others with interest, speculation business etc. Bangladesh Bank or Head offices of that institutions specify the purposes for which loan will be sanctioned (before loan sanctioning).

Example:

Loan for cropping, poultry firm, cattle breeding, fisheries, handicrafts. Loan is not sanctioned except for the above purposes, normally.

b) Applicant’s performance in rural area:

Generally people who do not have houses, land property or business property do not get loan. Applicants who are guests, beggars, travelers do not get loan.

c)Applicant’s reputation and usability of loan:

It must be ensured, that applicant is trustworthy and will use the loan properly, through loan application or interview or from his/her neighbors.

d) Collateral:

This is wanted to ensure recovery of loan. Example of collateral: mortgage property, valuable

ornaments or personal guarantee of any powerful man.

e) Financial benefit from loan usage:

How much net income will exist after meeting all the expenditures for the purpose for which

loan is wanted, should be examined. For landless and marginal farmers: how long s/he will

be engaged in work using the loan-is the consideration.

Mostly all rural credit institutions consider the above points. Moreover, cooperatives and many other institutions look for the past repayment history

3.19 Risk of rural credit:

There are two types of risk:

1) Lender’s risk

2) Borrower’s risk

Lender’s risk: The followings are the risks of the lender:

· Inflation may reduce the actual value of the loan.

· Problem in loan repayment.

· Loan may be bad.

· Relationship between lender and borrower may be disturbed.

Borrower’s risk: Borrower may face the following risks:

· If lender does not record repayment properly.

· If the loan cannot be used on elements (raw materials, machineries, fertilizer, seed, pump etc.) for scarcity in the market.

· Unavoidable misuse of the loan for any accident.

· Loss of the loan amount before using, when in home.

· If the borrower does not achieve estimated financial result.

· Disturbance in using the loan for natural calamity.

3.20: Essential characteristics of effective rural credit system

Properly planned and managed rural credit system can do well both for the lender and borrower. ‘Mr. Tardy’, rural credit expert tells some characteristics that are to be followed for the effective system. Those are:

1) Credit in accordance with usage time should be comparatively long termed.

2) Credit cost of the lender and borrower should be comparatively minimum.

3) Adequate security must be ensured.

4) At the time of economic depression loan installment and other conditions of repayment should be flexible on the basis of he borrower’s income and capacity.

5) Efficient and trained loan officers should maintain credit system.

All Indian rural credit survey committee also specifies some suggestions for effective and proper credit system. Those are:

1) Rural credit system should be concerned with national policy.

2) Institutional rural credit must be proper alternative of non institutional rural credit.

3) Institutions engaged in rural credit must have adequate fund.

4) Loan officers of those institutions should be properly trained and cordial.

5) Not only the movable and immovable properties at present but also the assets or goods that will be produced in future by using the loan should be considered as collateral.

6) Financial cooperation amongst rural villagers should be developed through the system.

7) Proper monitoring must be ensured.

8) Institutions must be cautious about legal needs and interests of the borrowers.

Now, the characteristics suggested by the author are:

Ø Institutions involved with rural credit must be granting loan in a preplanned way to all areas, villagers (landless/marginal farmers, agricultural labor, small, medium, large farmers, cottage industry labor and rural businessman) and economic sectors with prefixed amount and speed.

Ø Training, related to motivation and change of mind setting should be given to the employees of the institutions.

Ø Risk should be minimized and for this rural credit insurance system should be inaugurated.

Ø In proper time loan application granting and disbursement should be done.

Ø Granted loan amount should be sufficient for proposed work.

Ø Loan repayment scheduled should be considered flexible for the villagers who are very much lagging behind.

Ø Importance should be posed on financial results of the purpose of the proposed loan rather than collateral.

Ø Training to the borrower about advantages of proper usage and timely repayment of loan should be given.

Ø Concise application and less formalities, documents should be maintained for loan granting.

Ø Short and long term credit should be granted cindering the loan applicant’s current production cost and comparatively long term investment.

Indebted Villagers and Non-institutional Source of Finance

4.1 Vicious Circle of Poverty

From historical analysis it can be seen the villagers in Bangladesh, thus, Indian subcontinent have been passing through various sorts of economic hardship for the last centuries. Minimum necessary conditions for economic development were not within the control of the villagers of this region. Minimum conditions are:

a) High rate of use of capital

b) High rate of saving

c) Education

d) Efficienccy

e) Technology

The villagers of this region are relatively backward in education. Though the people are highly industrious, many work like inefficient and general farmers or laborers.

The people of Indian Sub-continent are historically averse to advanced western technology. As a result, uneducated, inefficient labor and without technology ordinary production process did not help to improve the economic condition of the people of this region. Consequently, the productivity of the land and production per acre of land in this region are very low compared to other neighboring countries. Therefore, a very small proportion of income was saved after meeting all the yearly expenditure. Even this saving is close to zero for 70 percent of villagers. As a result, this huge mass of villager are forced to take high amount of loans from money lenders and other non-institutional financial organization for following year’s agricultural production expenditure and even for daily living expenditure for the current year. On the other side, 20 percent of village who have little saving left take loan to finance long-term and working capital expenditure for the next year. Less than the rest 10% of people who have savings to invest, adopt production process on modern and commercial basis as they are relatively educated and employ advanced technology and efficient technicians. As a result the production cost is greater than the savings and for this reason some of them are forced to take loans.

Therefore, it can be observed that, as a result of supply of savings is quite less than the demand in rural areas, capital necessary for adoption of advanced production strategy is becoming highly scarce. That is why amount of capital invested is very low. And low invested capital makes low production and very low income. And if income is low almost nonexistent saving is left after meeting all the expenditure. And if low level of saving is formed then the scarcity capital for investment becomes very high. This continuation of the condition of year after year is called vicious circle of poverty.

This miserable condition of the villagers in the Indian Sub-continent is mentioned in the Agricultural Commission (1928), Banking Commission (1930-31) etc. of the British period. Even today this same condition is continuing. This is evidenced by the very fast rising number of landless farmers. It is found in many surveys that the number of landless farmers is rising by 4 to 5 percent of the past figure. In the survey conducted by FAO in 1960 then , East Pakistan, in other word Bangladesh landless families in rural areas were 17 percent and only within 15 year that has risen to 50 percent in 1976.

4.2 Consequence of Scarcity of Institutional Loan

In the last chapter it was discussed that institutional loan is very minuscule in accordance to need. No comprehensive survey was conducted in Bangladesh to estimate the demand and supply (especially from non-institutional sources) of rural finance. According to figures obtained from the three surveys that were conducted till today with few samples in 1956 amount of institutional finance was 5 percent. According to survey of Co-operative Department in 1965 this amount rose to 15 percent. However, after independence this figure fell to stand at 9 percent. The author’s own estimate this amount is still (1987) not more than 10 percent.

From the above mentioned analysis one can get the entire knowledge about the scarcity of institutional loan. However, families with low saving low savings are forced to arrange loans regularly from non-institutional sources despite adverse condition for their own sake. This type of family loan is continuing from one generation to another in Bangladesh i.e. the Indian Sub-continent. Although there is no separate survey about indebtedness of villagers in Bangladesh, there are some estimates of amount of indebtedness in undivided India. Some figures related to this is given below:

Flow of Indebtedness in Villagers of Indo-Pak Sub-Continent

Year of Estimation	Figure of Sanctioned Loan	Source of Survey
1875	Rs. 371 per family	Riot Commission
1880	Rs.1/3 of rural family	Famine Commission
1895	Rs.45 Crore	Sir Frederick Nickelson
1901	Rs.4/5 of family	Famine Commission
1911	Rs.300 Crore	Sir Edward McLaughlin
1925	Rs.600 Crore	Sir M L Darling
1930	Rs.900 Crore	Investigation Department of Central Bank
1935	Rs.1200 Crore	P J Thomas
1937	Rs.1800 Crore	Reserve Bank of India
1938	Rs.1800 Crore	M E V S Menon
1939	Rs.2200 Crore	Dr. R K. Mukharji
1945	Rs.1300 Crore	Dr. S N Naidoo

Although the figures of above table are not comparable perfectly due to the survey technique and sample collection still they are sufficient to draw the gradually deterioration of indebtedness of rural people.

Manner of Indebtedness in Rural Areas after Partition of India (1947)

The figures from the surveys that were conducted about the entire condition of villagers indebtedness and economic condition in this region are given below:

Condition of Rural Credit in northern division of Bangladesh