Credit Accessibility of Small and Marginal Farmers in Bundelkhand

Transcription

1 Credit Accessibility of Small and Marginal Farmers in Bundelkhand ABSTRACT -Dr VINOD SEN -H. R. PRAJAPATI Access to credit generally refers to the possibility of individuals or an enterprise to access financial services from the formal sources or carrying capacity of loans from financial institutions. Accessibility is determined by the demand and supply factors. This section tries to find those factors which are responsible to access credit from banks by the small and marginal farmers. Bundelkhand is sited in Vindyan plateau and it has a rocky terrain. It is identified as deficient rainfall and ground water resources. Rain often fails in the region, which carried distress conditions in pocket of the districts regularly. Due to uncertainty of rain fall the region regularly suffer from droughts. The soil of Bundelkhand region has low water retention capacity. Scheduled caste has large proportion relatively in this region and the small pockets of tribal population also lives. Economy of the region is heavily based on agriculture and livestock. Nearly, 80 per cent cultivators are small and marginal formers. High unequal distribution is found in land ownership, which leads people toward social conflict. Access to credit generally refers to the possibility of individuals or an enterprise to access financial services from the formal sources or carrying capacity of loans from financial institutions. Accessibility is determined by the demand and supply factors. This study tries to find those factors which are responsible to access credit from banks by the small and marginal farmers. The study assumes that supply is exogenously determined by the Central Bank or Government. On the other hand, in demand side, the factors which have been taken for econometric analysis are significantly accessible by the credit. KEYWORDS: CREDIT ACCESSBILITY & MARGINAL FARMERS. 1.1 REVIEW OF LITERATURE: Why small and potential borrowers do not have sufficient access to formal credit is adequately explained by McKinnon (1973) and Shaw (1973) are conclude that the ceilings on interest rates do not permit banks to incorporate the additional administrative costs involved in advancing and supervising small loans. Gonzalez-Vaga (198), Anderson and Khambata (1985) was found that the formal lenders basically ration credit to the small borrowers in order to reduce their trans- 42 IJHPD Vol. 2 No. 2 July - Dec. 2013

2 action costs, which are high for servicing small borrowers. Sarap (1991) is of the view that a typical borrower has no access to the organised credit market because of the inability to offer the acceptable collateral. Credit is invariably rationed in terms of the ability to offer collateral. Sarap (1990) tried to identify the determinants of access to formal credit in rural India, as mere existence of credit institutions in an area does not guarantee that it will benefit the farmers of the region, especially the small farmers. The low bargaining power, bureaucratic and procedural formalities required, asset based lending and policies of financial institutions and corruption prevailing in these agencies, all worked against small farmers. The small size of holdings, the informal and oral nature of tenancy contracts, illiteracy, and low caste status were other inhibiting factors. The higher transaction costs with formal lending have led to an increase in effective rate of interest. Sidhu and Gill (2006) have discussed the issues related to agricultural credit and Indebtedness in India. The accessibility to institutional credit was found to be higher in the southern region and very poor in the north-eastern region. Also, it was highly related to level of agricultural development. The increase in institutional credit was highest in the northern region while lowest in the central region. Golait (2007) credit delivery to the agriculture sector continues to be inadequate. It appears that the banking system is still hesitant on various grounds to purvey credit to small and marginal farmers. Kumar Anjani, Singh K. M. And Sinha Shradhajali (2010) Institutional credit flow to the agriculture has been increasing for the past four decades and structure of the sources of credit has witnessed a clear shift and commercial banks have emerged as the major source of institutional credit to agriculture. 1.2 METHODOLOGY: A new methodological framework is used for measuring credit accessibility and determinants of access to credit by small and marginal farmers and the effects of access to credit on farmer s behaviour and welfare; and to represent the methodology with data collected from Banda district on the extent of rural farmers access to credit and credit constraints in backward regions. Since the method of presenting the empirical evidence is almost exclusively tabular, descriptive and statistical have.been summarized. H0: Accessibility of institutional credit is equally influenced by all variables. For testing the hypothesis used cross section data of sample, (105) households and 70 respondents who have taken credits from the banks and others 35 which have not taken credit from the banks, were considered. The accessibility of credit depends on various factors. The present study selected some possible explanatory variables which influence the access to credit of an individual. The Probit model has been used in the study and to identify those variables which best characterise the status of households in the assessment of institutional credit. Model specification in specifying a Probit model, a random variable IJHPD Vol. 2 No. 2 July - Dec

3 Yi* (dependent variables) takes the value of 1 if the event occurs i.e. if small and marginal farmers have access to formal credit and zero if otherwise. The basic probit model is given below; Probit (p) = Intercept + BX Yi* = ß0 + Xi ßi + ei... (1) Yi = 1if yi* 0 Yi 0 otherwise Xi = f (x 1, x 2, x 3, x 4, x 5, x 6, x 7, x 8, x 9, x 10, x 11 ) Where : i = 1, 2, 3...k, dependent variable Y = 1, if the household head had access to institutional credit and 0 ß0 = intercept, ßi = regression coefficient, ei = error term. Xi is the function of all explanatory variables. TABLE 1 DESCRIPTIONS OF EXPLANATORY VARIABLES Independent Type Description Variable x1 (Age) Numeric Age of house hold x2 (Gender) Binary Male for 1, otherwise 0 x3 (HH size) Numeric In number x4 (Size of land) Numeric In Acre x5 (Social group) Numeric SC = 1, ST = 2, OBC = 3 and GEN =4 x6 (Education) Binary Educated for 1, otherwise 0 x7 (Branch dist.) Numeric Distance of bank branch in km x8 (Interest rate) Binary Play role to access credit ; yes for 1 otherwise 0 x9 (Agent) Binary Play role play role to access credit; yes for 1 otherwise 0 x10 (Employment) Binary Farming/ self employment for 1, otherwise 0 x11(annual Y) Numeric Income range 1= less than 1 lakh, 2= 1-2 lakh, 3=2-4 lakh, 4= 4-6 lakh 5= more than 6 lakh Source : Based of various studies Furthermore, the probability of an event occurring depends on the vector of independent variable X and ßi, the regression coefficient. The probit probability functional form where a standard normal distribution function is used to transform the original data of the binary Model is expressed as: F ( Z ) z w 1 u 2 d e...(2) IJHPD Vol. 2 No. 2 July - Dec. 2013

4 Where: (Z) = Xi ß. The Probit model that has been specified in the study to analyze farmer s accessibility to formal credit can be seen below. 1.3 CREDIT ACCESSIBILITY OF FARMERS: Access to credit affects farmers welfare outcomes through at least two channels. First, it alleviates capital constraints to agricultural small and marginal farmers and expenditures on agricultural inputs like seeds, fertilizers, labours wages, ploughing cast etc. It must be incurred during the time of crop plantation and sowing period, while returns are received only after the harvest of the crop, several months later. Therefore, to finance the purchase of inputs, farmers have to go either with savings or obtain credit. Hence, access to credit can significantly increase the ability of poor farmers with no or little savings to acquire needed agricultural inputs. Access to credit also reduces the opportunity cost of capital-intensive assets relative to family labour, thus encouraging labour-saving technologies and raising labour productivity, a crucial factor for development, especially in many African countries (Delgado 1995; Zeller et al. 1997). The second channel of access to credit that affects famers welfare is by increasing their risk-bearing capacity and altering its risk-coping strategy. Just the knowledge that credit will be available to moderate consumption against an income shortfall should be potentially profitable but risky, investments can turn out badly and this will induce the household to bear the additional risk. Therefore farmers may be willing to adopt new, more risky technologies (Eswaran and Kotwal 1990). A household may also benefit from mere access to credit, even if it is not borrowing because with the option of borrowing, it can avoid adopting risk-reducing but inefficient, income diversification strategies or engaging in precautionary savings with negative returns. Table 1, shows the explanatory variables which are selected for the analysis of credit accessibility. There many other factors which also influence the browning due model limitation. Behaviour of an individual is different from the others, so it is not easy to know all the factors. TABLE 2 SUMMARY OF THE MODEL Case N Marginal Percentage Not access to credit % Access to credit % Valid % Missing 0 Total 105 Source : field survey data (2012) IJHPD Vol. 2 No. 2 July - Dec

5 Table 2, shows the total number of observations, in which 67 percent constraints sample are credit borrower and rest are the non borrowers. Total number is 105. The farmers who are having an access to credit from Allahabad UP Gramin bank Punahur branch. TABLE 3 CHI-SQUARE TEST FOR GOODNESS TO FIT Chi-Square df a 3 Sig. Pearson Goodness Fit Test 2.170E Source : field survey data (2012) Table 3, shows the chi-square test which rejects the null hypothesis at the 10 percent level of significance. So the probit model can proceed. All the independent variables are not equally influenced by credit accessibility. Table 3, shows the chi-square test which rejects the null hypothesis at the 10 percent level of significance. So the probit model can proceed. All the independent variables are not equally influenced by credit accessibility. TABLE 4 DETERMINANTS OF ACCESS TO INSTITUTIONAL CREDIT (Probit Model) Parameter/Explanatory Estimate Std. Error Z (t value) M.E (Sig.) variable (x 1 ) Age ***.088 (x 2 ) Gender **.014 (x 3 ) House hold size (x 4 ) Land size (Acre) **.042 (x 5 ) Social group (x 6 ) Education (x 7 ) Distance (x 8 ) Interest rate (x 9 ) Agent *.000 (x 10 ) Employment (x 11 ) Annual income Intercept Chi square Pseudo R Source : field survey data (2012) *, significant at 1%, **, significant at 5%, and ***, significant at 10%. 46 IJHPD Vol. 2 No. 2 July - Dec. 2013

6 Probit regression model is used to identify the factors which influence households (small and marginal farmers) access to the institutional credit in the study area. Table 4 shows the maximum likelihood estimates of the probit model. The significance of log likelihood ratio and chi-square shows that the probit model is fit for the analysis. Result shows that, four explanatory variables (coefficients) out of eleven explanatory variables are significant, at least at the 10% level of significance. It is evident from the table that age of the household, gender, size of landholding and the role of agent are significant. Age of farmers is significant because of land holding, that is required for access to credit; the land ownership was traditionally on the name of our elders. The marginal effect indicates that an increase in the age of the farmer by one year increases the probability of the variables which influences access of farming households. Besides these, there is another factor which influences the access to credit. Agent also plays a major role in providing access to the credit from bank. Respondents were told that if they fulfil the entire requirement, there is very less possibility to access loan without paying bribe/commission. The bribe/commission amount is distributed between the agent and manager. The respondent farmers told that they paid 10 to 20 per cent of total borrowing amount as bribe/commission. 1.4 SOME ISSUES RELATED TO CREDIT ASSESSMENT: There is need to discusses some issues and problems that are faced by the famers. The respondent farmers were very sad with the nature of bank manager; reason was that one fifth of total loan amount was pending it was due to non cooperation between manger and farmers. Resultant cost of borrowing increased by many folds. Following problems were faced by the small and marginal formers during their access to credit from banks Accessibility Problems Currently, the share of institutional sources of credit though has increased to a large extent in the wake of various measures adopted by the government from time to time it has still not been able to replace the non-institutional sources of finance. Generally, it is accepted that resource less, illiterate and land less marginal formers face a lot of problems in getting the loan from the banks. The fact that farmers with no land holding are more prone to face the problem of nonavailability of loans is really very concerning. So, the sampled farmers were asked about the difficulties being faced by them in the procedure or processing of loans. In the survey area, it was found that farmers waste their time and money in getting loans. Disappointingly, after that they pay huge commissions to agent/ manger for sanctioning loans in almost all the organisations related to this issue. IJHPD Vol. 2 No. 2 July - Dec

7 Commission agents advance the loans to agriculturists for productive purposes against their crops without completing legal formalities. They charge a very heavy rate of interest on the loan and a commission on all the sales and purchases, making it exploitative in nature. Time is important for farmers because if head of the household is not present at home, some agricultural activities are delayed. So the cost of credit increases by many folds than the actual cost. For example, a farmer who shares, he will first be giving some charges to get Kisan Credit Card issued and this all takes at least one month. After that, when he goes to the bank, the manager of bank takes more than one month but he is still not able to receive the loan and goes to the agent who will take nearly about 17 percent of the total credit amount and then he gets actually Rs 50,000 out of Rs 60,000 and pays an additional cost of Rs10, 000. This problem is not of any particular individual but faced almost by all KCC holders in the sample area Additional Cost of Obtaining Loans Generally, interest rate is taken as the measure of cost to obtain credit, for all types of borrowing. To add to this, the real cost of credit from financial sources gets further increased due to the fact that debtors have to spend considerable time and money by way of incidental charges in fulfilling the formalities required. This is true in case of institutional sources of finance and a proper procedure including rules and regulations are followed in providing the credit for different purposes. The transaction costs vary according to the farmers while obtaining loans from different sources of finance Time Factor in Loan Acquisition Time factor is a significant component of loan procedure and contributes towards transaction cost. This cost is also bearing by agricultural operators and it adversely affecting the crop yields. Timely availability of loan along with the adequacy of amount is one of the crucial task that can plays a leading role in higher production as well as productivity, as credit quoted, credit delayed is worse than credit denied, it implies on the utilization of loans and repayment performance of the borrowers. The procedure of loan advancement is commonly vague in case of institutions. The process of issuing loan is complicated and time consuming. Many formalities like filling of loan applications along with photographs, non-encumbrance certificate from revenue officials, procurement of land records, no dues certificates from other lending agencies in the area and completion of formalities regarding registration of land, all result in delays and prove to be expensive for the cultivators and finally adversely affect the extent of borrowings. Most of the times, the farmers are neither educated nor aware to the prevailing complicated lending procedures of these agencies and fail to avail the loan facilities from institutional sources of finance. 48 IJHPD Vol. 2 No. 2 July - Dec. 2013

8 1.4.4 Social Cost of Borrowing The social annoyance faced by the borrowers in obtaining loan from the different institutional agencies due to the mounting injustices. These institutions can be gauged from their responses in terms of their perceptions regarding inconvenience, sacrifice, humiliation and bribes. Out of the total (70) sample of marginal and small farmers, 99 per cent found it inconvenient to borrow from institutional sources, 90 per cent felt the sacrifice in terms of time and money, and 88 per cent felt humiliation and 99 per cent responded with bribe payment as a must to get the loan. The foregoing analysis indicates that social cost was found to be decreasing with increase in the size of operational holding because of the fact that lower category farmers are more uneducated, less resourceful, spent more money in obtaining credit from the institutional sources while higher category farmers have more resources at their disposal, good social links have to bear lesser social cost. Still, social cost acts as tentative hurdle in the regulation of the pace of rural development Process for Applying Loan and delay in Processing It is a common observation that procedure for applying loan and time taken in its sanctioning plays an important role in deciding about the source of credit. The general perception is that formal atmosphere, lengthy procedure and time taken by the institutional sources of finance while processing of loan are the inhibiting factors due to which the farmer is hesitant to go to these institutions for loans. So, sampled farmers were enquired about the initial procedure and also about the time taken in sanctioning the loan by the credit source. 1.5 CONCLUSION: Generally Farmer s borrow credit form banks, relatives and moneylenders for purchasing seeds, chemical fertilizers, equipment, payment of irrigation from tube wells and payment for ploughing by tractors whenever necessary. For above all purpose, farmers need short term loans, which can be accessed for from any Commercial Banks and Regional Rural Banks under the KCC scheme with reasonable rate of interest, but the essential condition is that farmer should have his own land. The study finds that accessibility of institutional credit for small and marginal farmers are driven by four variables out of eleven explanatory variables, which are significant, at least at the 10 per cent level of significance. It is evident that age head of the household, gender, size of landholding and role of agent are significant in assessment of institutional credit. It also cleared that the cost of loans increases many folds due to delay in the delivery processes and present of the agents. The sanctioning of loan totally depends on the satisfaction of manager and IJHPD Vol. 2 No. 2 July - Dec

9 the commission of the middlemen including him. Besides all the basic requirements, a certain percent of total amount is to be paid to the agent or manager. So it cleared farmers or other consumers are illegally exploited both by bank authorities as well as the middlemen. REFERENCES: Delgado, C. (1995): Africa s Changing Agricultural Development Strategies: Past and Present Paradigms As A Guide to the Future, 2020 Vision Food, Agriculture, and the Environment Discussion Paper 3, Washington, D.C., International Food Policy Research Institute. Ellinger, N. P. and Peter J. B. (1991): Agricultural Credit Delivery Costs at Commercial Banks, Agricultural Finance Review, vol-51, Eswaran, M. and Kotwal, A. (1990): Implications of credit constraints for risk behaviour in less developed economies, Oxford Economic Papers, N.-S 42 (2), Golait (2007), Current Issues in Agriculture Credit in India: An Assessment, Reserve Bank of India Occasional Papers, Vol. 28, No.1, 82933pdf (accessed on 12/08/2012). Kumar, A., Singh K. M. And Sinha, S. (2010): Institutional Credit to Agriculture Sector in India: Status, Performance and Determinants, Agricultural Economics Research Review Vol. 23, pp Long, J.S. (1997): Regression Models for Categorical and Limited Dependent Variables, London, Sage Publications. Oyedele, G. A. and Akintola, J. O. (2012): Determinants of Access to Credit in Nigerian Agriculture, Journal of Development and Agricultural Economics, Academic Journals, Vol. 4(10), pp Sarap, K. (1990): Factors Affecting Small Farmers Access to Institutional Credit in Rural Orissa, India, Development and Change, vol-21, Sidhu, R.S. and Singh, S.G. (2006): Agricultural Credit and Indebtedness in India: Some Issues, Indian Journal of Agricultural Economics, vol-61 (1), Srivastava D. and Kumar V. (1985): Cost of Credit, Financing Agriculture, vol.17 (1), Subbarao, D. (2012): Agricultural Credit-Accomplishments and Challenges, RBI Bulletin, August Wooldridge, J. (2002): Econometric Analysis of Cross Section and Panel Data, Cambridge, MIT Press. Zeller M., Schrieder, G., Braun, J.V. and Heidhues, F. (1997): Rural Finance for Food Security for the Poor: Implications for Research and Policy, Food Policy Review No. 4. -Dr. Vinod Sen Assistant professor in Central University of Gujarat School of Social Sciences, Center for Studies in Economics and Planning senvinod79@gmail.com, Mob. O H. R. Prajapati PhD Research Scholar of Central University of Gujarat in Economics, School of Social Sciences, Center for Studies in Economics and Planning, harry.cug@gmail.com, Mob IJHPD Vol. 2 No. 2 July - Dec. 2013