Rural Credit
For Rural Development

By Uttam Maharjan

RURAL credit has a significant role to play in rural development. As Nepal is a predominantly rural country having around 4,000 village development committees, where 85 per cent of the people live, it is imperative to develop rural areas for overall national development. To conceive of national development without taking into account rural development is like building castles in the air.

Urban-centred

Since the restoration of multi-party democracy in Nepal, financial institutions-banks, finance companies and cooperatives-have mushroomed in every nook and corner of the country. But most of such entities are concentrated in urban areas, which have, no doubt, more facilities and amenities than rural areas. As a result, rural areas have not been able to reap benefits from such financial institutions.

There are two types of financial sectors in Nepal: formal and informal. Formal sectors include institutionalised sectors like banks, finance companies and cooperatives, whereas informal sectors included money lender, zamindars (landlords) and local merchants. As private financial institutions are reluctant to branch out to rural areas for fear of losing money and government institutions have not been able to provide financial facilities for rural people adequately, the rural people have relied on informal sectors to meet their requirements. Ignorance, naivete, gullibility and such other weaknesses on the part of rural people are factors that lead them to perfer informal credit to institutional credit. Moreover, as institutional loans are full of hassles as compared to informal loans, it is but natural for these people to go for informal loans.

Informal credit is very costly. The rate of interest ranges from 25 per cent to 100 per cent. Besides, the money lenders may impose free labour and additional fees on the borrowers. And, by manipulating bonds, they may increase the principals many times so that the borrowers cannot get out of their debt. This has subjected them to a life of servitude.

It is these unscrupulous money lenders, zamindars and local merchants that oppose the extension of financial institutions to rural areas. It is also that they take loans from rural financial institutions at a low rate of interest for re-lending at a higher rate of interest. As per the Rural Credit Survey of Nepal Rastra Bank, 80 per cent of rural households in rural areas depend on informal sectors. Thus, a large chunk of the rural people fulfill their requirements through informal sectors.

The main institutions providing rural credit are Agricultural Development Bank (ADB) and Rural Development Banks (RDBs). Being in a state of crisis, ADB cannot serve all the VDCs. As it has expanded its business to urban areas also, it is not interested in rural areas only; a profit motive has also been embraced by it. On the other hand, RDBs are concentrated in Teal areas. They have not served hilly and mountainous regions. Also, RDBs are in existence to serve those living below the poverty line; small, medium and large sections of rural folk are deprived of RDB services.

Banks, finance companies and cooperatives fear expanding their networks in rural areas. As the rural economy is predominantly agro-based and agricultural products are subject to damage, financial institutions hesitate to extend rural credit. As most villagers are poor and so are not in a position to provide adequate collateral for loans, they are deprived of institutional loans. There are also problems with loan recovery. For all these reasons, the flow of rural credit is very minimal.

To enhance rural credit, government interventions is necessary, although it is against the tenets of free-market economy and liberalisation. The one rural branch for one urban branch provision must be strictly implemented. As there is always an element of insecurity in rural credit, as in other credit, insurance of such credit through Deposit Insurance and Credit Guarantee Corporation may convince financial institutions of safety of their credit outflows.

In point of fact, rural credit at an exorbitant rate of interest is a contributory factor to rural poverty. Institutional credit could play a catalytic role in extricating rural people from the clutches of money lenders. For this, rural credit must be enhanced in a sustainable manner. A special fund could be set up to finance financial institutions devoted to rural credit extension. And, it will pay to educate rural people about the benefits of institutional credit vis-à-vis informal credit. People also rely on easy credit, although at a higher rate due to hassles associated with the disbursement of institutional credit.

Help

The extension of financial services to rural areas will help put in place infrastructures for development, leading to rural development by alleviating rural poverty.

Other Story

• Developing Organisational Staff