Persistence of Informal Credit in Rural India: Evidence from “All-India Debt and Investment Survey” and Beyond

Author: Pradhan, Narayan Chandra
Publication: RBI Working Paper Series WPS (DEPR) (2013).

Abstract: Rural credit markets in India is characterised by the coexistence of both formal and informal sources of finance and the market is fragmented. To discuss the informal rural credit issue and to maintain consistency with All India Debt and Investment Survey (AIDIS) data, this paper treats credit supplied by non-institutional agencies as informal while institutional agencies as formal sources of credit. It covers both ‘All-India Rural Credit Survey 1951-52’ (RBI, 1954) and ‘All-India Rural Debt and Investment Survey 1961-62’ (RBI, 1965) conducted by the Reserve Bank and four rounds of All-India Debt and Investment Surveys by ‘National Sample Survey Organisation’ (NSSO) of the Government of India from 1971-72 to 2002-03. In the absence of further survey data, to extend discussion on rural credit scenario including ‘Micro Finance Institutions’ (MFIs) beyond 2002, the paper has heavily drawn upon four recent official Reports: (i) Report of the Technical Group to Review Legislations on Money Lending (RBI, 2006), (ii) Report of the Task Force on Credit Related Issues of Farmers (GOI, 2010), (iii) ‘Malegam Committee Report’ (RBI, 2011), and (iv) Micro Finance Institutions (Development and Regulation) Bill, 2012 (introduced in Parliament on May 16, 2012). It is assessed that the share of rural informal credit in total outstanding debt has been certainly decreasing over the period from 1950 to 2002 with various financial inclusion initiatives of the Reserve Bank and legislations of the various state governments to regulate moneylenders. However, about two-fifth of the rural households’ dependence on informal credit, even today, indicates further scope for financial inclusion in rural areas. This augurs well for new financial sector initiatives in the form of prompt and innovative policy responses to prioritise financial inclusion, financial education as well as financial literacy.

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