Rural Banking: Performance, Critical Problems and Policies

Abstract

Rural Financial Institutions (RFIs) have been built over decades by appropriate changes in institutional (non-price policies) and the interest rate structures and processes. Four significant achievements are: improved access of marginal and small farmers to credit; remarkable rural financial deepening; somewhat diversified multi-product loans to farmers, inputs dealers and agro-marketing and processing agencies; and positive, tiered and stable real interest rates. Present critical problems of RFIs are low geographical coverage, low reach of the rural households and high loan delinquency. These problems could be resolved by appropriate changes in non-price policies rather than improved revision in interest rates at present juncture. This is because all four RFIs have scale economies and/or constant returns to scale in their costs. Moreover, rural loan demand has become interest elastic. This note also discusses non-price policies which would enable RFIs to be growth-oriented viable institutions.