The rural credit market in has seen a sea-change with the passage of time. This relates to both quality and quantity of services provided. The incremental presence of the formal sources of credit, comprising banks and non-governmental organisations (NGOs), is in evidence in every nook and corner of the country. These enable rural households' access to credit from cheaper formal sources in lieu of the expensive informal sources. The progress has been dubbed as advancement towards inclusive finance. But the reality on the ground reflects a different condition and critics argue that the market is not as inclusive as it is thought of by concerned quarters.
Over time, as revealed by empirical studies, improvements in rural finance are evident from the following information: (a) the dominance of the informal market - moneylenders, traders, landowners, and friends and relatives - dwindled to a large extent; (b) the share of rural households, especially of poorer ones, accessing loans from banks and cooperatives has increased manifolds during the last few decades; (c) in earlier periods, two-thirds of the households borrowed from the informal market - 92 per cent from among the landless group. Again, the share of informal market in total loans was 75 per cent, of which 92 per cent for the landless.
However, the share of rural households borrowing money increased from 38 per cent to 48 per cent over the 1988-2014 period. The access to credit expanded more for the functionally landless households than for the landowning households due to targeting of micro-credit towards functionally landless households. What is to be noted is that despite huge expansion of microfinance over the last two decades, almost half of the rural households still remains excluded from the financial market. This poses a big question mark to the notion of financial inclusion.
Nevertheless, the supply of institutional credit has expanded substantially over 1988-2014, mostly due to loans provided by non-government MFIs (microfinance institutions). MFIs' share of total loans increased from a feeble 8.0 per cent in 1988 to 49 per cent in 2000, and further to 56 per cent in 2014. The high-cost informal credit market has shrunk, but still about one-fourths of rural households take loans from informal sources, accounting for one-third of total loans. The growth in the average size of loan increased substantially during 2000-14 compared to 1988-2000 period, presumably due to faster growth of the economy. MFIs have been conservative in increasing the size of loans compared to other sources (one-third compared to financial institutions). Banks now serve fewer members but have increased the size of the loans by 10 per cent per year, compared to only 2.4 per cent by MFIs. Even the informal sources provide loans of larger amounts than the MFIs.
The initial target group of MFIs was households owning up to 0.5 acres (functionally landless group). It is a general perception that extreme land-scarce households do not access loans from the MFIs, because they are afraid to handle money.
Non-farm households now account for about half of the total households in the villages. The largest share of MFI loans go to these households, but more or less according to their weight. It is a common perception that tenants who do not have any land of their own (pure) are not reached even by the NGO-MFIs. However, a much larger proportion of tenant households are targeted by the MFIs than their actual weight.
Households engaged in businesses have more than proportionate share of MFI loans. Similar is the case for households engaged in wage labour for livelihood. The most-benefitted recipients of MFI loans are however those engaged in transport operations.
In 2014, nearly two-thirds of the loans were used for agricultural and non-agricultural investments. Borrowers now use a small fraction of the loan for purchasing food, almost half compared to the past. But the use of loan for repaying old debt has increased. The land productivity for the whole year is 15 per cent higher for borrowers, compared to all farmers and those who did not take loans from MFIs.
The accumulation of capital has increased substantially for agriculture and non-agriculture households over 2008-2014 period. The same is the case with regard to value of livestock and poultry holding for non-borrowers, but not for the MFI borrowers. However, there is not much difference in accumulation between MFI borrowers and non-borrowers. The coverage of membership is the highest for the Grameen Bank, which covers nearly 14 per cent of all rural households; BRAC covers only eight per cent. The extent of overlap with other organizations varies from 36 to 49 per cent.
In general, households perceive that their economic condition has improved during 2000-2013 period. Among Non-MFI members, 54 per cent reported that they were better off, while 14 per cent reported that their condition had worsened. The net change was 40 per cent. Among MFIs, the extent of progress is better for members compared to non-members.
Households taking multiple loans reported higher rate of improvement than those taking single loans. The proportion reporting deterioration in economic conditions was also lower among those taking multiple loans than those taking only one loan. The survey also showed that households taking multiple loans reported improvement at a higher rate, but the difference had narrowed down. A larger proportion of households taking multiple loans reported deterioration in economic conditions, than those taking only one loan.
By and large, rural finance has progressed well but inclusivity is still a concern. Half of the rural households are still excluded, by choice or by compulsion from accessing credit. A larger share of households still relies on informal sources of credit at exorbitant rates of interest. The market is dominated by NGOs, but government sources have been shrinking despite tall talks about inclusive finance.
Abdul Bayes is a former Professor of Economics at Jahangirngar University. abdul.bayes@brac.net/