Credit to employment-intensive sectors: Is the revival real?

R. Ramakumar

Pallavi Chavan

Rate of growth of credit from scheduled commercial banks to major employment generating sectors, 1975-2006, in per cent per annum

Item 1974-75 to 1979-80

1980-81 to 1989-90

1990-91 to 1999-2000

2000-2001 to 2005-06

Growth rates of credit supply to (per cent):

Agriculture 20.4 8.7 1.8 20.5

Artisans and craftsmen 27.4 21.0 2.3 14.1

Small-scale industries 12.0 7.5 2.4 4.1

All sectors 12.9 7.9 6.7 17.7

Decadal growth rates of real GDP from (per cent):

Agriculture 1.1 4.7 3.4 1.9

Agriculture and allied sectors 0.9 4.4 3.4 2.0

Unregistered manufacturing 4.7 5.8 6.3 4.8 Source: RBI, CSO Note: Growth rates of credit supply have been estimated after deflating with GDP deflator.

Log plots of credit supply from scheduled commercial banks to major employment generating sectors, 1975-2006

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.019

75

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

Logs

of d

efla

ted

cre

dit s

erie

s

Agriculture Artisans & Craftsmen SSIs

Amount of credit outstanding per million population in rural areas, deflated figures, 1975-76 to 2005-06

0

20000

40000

60000

80000

100000

120000

140000

1975

-76

1976

-77

1977

-78

1978

-79

1979

-80

1980

-81

1981

-82

1982

-83

1983

-84

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

Year

Cre

dit

pe

r m

illio

n p

op

ula

tion

(R

s)

Agriculture Artisans and craftsmen SSI

Actual trends in credit supply to agriculture between 1980 and 2006, and projected linear trend from the 1980s

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

Logs

of d

efla

ted

cre

dit s

upp

ly to

agr

icul

ture

Credit to agriculture Credit to agriculture-1980s Linear (Credit to agriculture-1980s)

Actual trends in credit supply to artisans and craftsmen between 1975 and 2006, and projected linear trend from the 1980s

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

Log

of d

efla

ted

cre

dit s

uppl

y to

A&

C

Log credit to A&C Log credit to A&C-1980s Linear (Log credit to A&C-1980s)

Actual trends in credit supply to SSIs between 1975 and 2006, and projected linear trend from the 1980s

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

Log

of d

efla

ted

cre

dit t

o S

SIs

Log credit to SSIs Log credit to SSIs-1980s Linear (Log credit to SSIs-1980s)

So, in agriculture, The sharp increase in flow of credit after the

late-1990s has not led to a revival in the growth rates of agricultural GDP.

On the employment front, between 1999-00 and 2004-05, the growth rate of agricultural wage employment declined.

Are certain features of the credit revival holding back its growth and employment linkages?

First, the growth rate in agricultural credit in the 2000s originates primarily from a growth in indirect finance to agriculture

Item 1974-75 to 1979-80

1980-81 to 1989-90

1990-91 to 1999-2000

2000-2001 to 2005-06

Growth rates of credit supply to agriculture (per cent):

(i) Total credit 20.4 8.7 1.8 20.5

(ii) Direct finance 23.3 10.0 1.5 17.4

(iii) Indirect finance 12.9 2.7 3.5 32.9

Source: RBI, CSO Note: Growth rates of credit supply have been estimated after deflating with GDP deflator.

Direct finance is credit given directly to agriculturists. Indirect finance refers to credit given to institutions and organisations that contribute to agricultural production.

Changes in the shares of direct and indirect finance in total agricultural finance, India, 1985 to 2006, in per cent

Share in total agricultural finance Year

Direct finance Indirect finance Total

1985 83.2 16.8 100.0

1990 86.8 13.2 100.0

1995 85.9 14.1 100.0

2000 84.5 15.5 100.0

2001 83.9 16.1 100.0

2002 74.1 25.9 100.0

2003 77.8 22.2 100.0

2004 72.8 27.2 100.0

2005 76.1 23.9 100.0

2006 72.1 27.9 100.0 Source: Basic Statistical Returns, RBI, various issues.

Actual trends in supply of direct finance to agriculture between 1980 and 2006, and projected linear trend from the 1980s

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

Log

of d

efla

ted

sup

ply

of d

irec

t fin

ance

Direct Finance 1980s Linear (1980s)

Actual trends in supply of indirect finance to agriculture between 1980 and 2006, and projected linear trend from the 1980s

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

Log

of d

efla

ted

sup

ply

of in

dire

ct fi

nanc

e

Indirect finance 1980s Linear (1980s)

New components of indirect finance Lending to NBFCs for on-lending to agriculture

(agri-clinics and agri-business); Loans to Electricity Boards to reimburse

expenditure incurred on providing power to agriculture;

Deposits held by banks in RIDF maintained with NABARD (deficits on priority sector);

Finance to dealers in drip/sprinkler irrigation systems and agricultural machinery;

Subscriptions to bonds issued by NABARD for financing agriculture and allied activities.

Secondly, a very large share of the incremental credit supply has been obtained

by big farmers

In the RBI publications, cultivators are divided in the following way according to land size-classes:

Marginal cultivators: < 2.5 acres Small cultivators: 2.5 to 5 acres Big cultivators: > 5 acres

Amount of agricultural credit outstanding per account by land size classes, 1980-81 to 2003-04

0

10

20

30

40

50

60

70

1980

-81

1981

-82

1982

-83

1983

-84

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Years

Am

oun

t ou

tsta

ndi

ng

per

acc

ount

(in

Rs

'00

0)

Marginal cultivators Small cultivators Big cultivators

Amount (deflated) per account for big cultivators: Rough trend lines for the 1990s and 2000s

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.019

80-8

1

1981

-82

1982

-83

1983

-84

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

Deflated big Deflated big-1990s Deflated big-2000s Linear (Deflated big-1990s) Linear (Deflated big-2000s)

Distribution of amount outstanding under total agricultural finance by scheduled commercial banks, by size classes of loans, in per cent

Share in total amount outstanding under agricultural finance (%) Size class of loan (Rs)

1985 1990 1995 2000 2003 2005 2006

25000 and less 49.6 58.7 52.0 35.2 23.6 17.8 13.3

25000 – 2 lakh 23.9 26.0 32.4 34.4 34.1 31.4

2 lakh to 10 lakh 35.3

4.3 5.1 11.7 14.0 17.9 19.7

10 lakh to 1 crore 7.4 7.6 7.6 6.6 6.3 6.4 6.1

1 crore to 10 crore 4.6 4.2 5.6 6.7 7.4 8.0 8.5

10 crore to 25 crore 1.7 4.0 3.3 4.3

Above 25 crore 3.0 1.3 3.5

5.7 10.4 12.6 16.8

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Basic Statistical Returns, RBI, various issues.

Thirdly, the revival has been driven by a remarkable growth in loans above Rs 10 crore

Distribution of amount outstanding under indirect agricultural finance by scheduled commercial banks, by size classes of loans, in per cent

Share in total amount outstanding under indirect agricultural finance (%) Size class of loan (Rs)

1985 1990 1995 2000 2003 2005 2006

25000 and less 7.4 10.1 6.9 2.8 2.8 1.6 0.9

25000 – 2 lakh 9.2 4.5 5.2 3.9 3.1 2.2

2 lakh to 10 lakh 19.7

8.7 8.8 5.6 10.8 6.8 4.7

10 lakh to 1 crore 32.4 40.1 32.2 21.7 11.7 12.4 9.5

1 crore to 10 crore 22.8 24.0 25.5 25.9 19.2 20.6 19.7

10 crore to 25 crore 8.6 11.7 9.3 9.6

Above 25 crore 17.7 7.9 22.2

30.3 39.9 46.2 53.5

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Basic Statistical Returns, RBI, various issues.

Who are the beneficiaries of the revival? Through a massive expansion of indirect

finance, leading to the sidelining of direct finance;

Through an expansion in credit supply to big farmers;

Through an expansion in provision of loans of size above Rs 10 crore, and particularly above Rs 25 crore.

Financial inclusion or exclusion?Distribution of Small Borrowal Accounts (accounts and amount) by major employment generating sectors, 1993-2004, in per cent

Share of number of accounts outstanding (%)

Share in total amount outstanding (%) Item

1993 1997 2001 2004 1993 1997 2001 2004 Agriculture and allied activities 45.8 45.5 38.8 33.4 42.4 42.2 32.1 29.1

Direct finance to agriculture and allied

activities - - 38.3 32.5 - - 31.5 28.4

Artisans and craftsmen and village and cottage industries

5.2 4.9 - - 3.6 3.2 - -

Other Small Scale Industries 2.8 2.2 - - 3.3 2.4 - -

Personal loans 14.2* 21.0* 30.9 41.8 18.3* 27.0* 36.7 43.3

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: RBI, Survey of Small Borrowal Accounts, various issues. Notes: - is Not available; * - includes personal loans and professional services.

The exclusion of Dalits and Adivasis from the formal financial system

Percentage share in the number of small borrowal accounts and amount outstanding, India 1993-2004

Share of number of Accounts (%)

Share in amount outstanding (%) Caste category

1993 1997 2001 2004 1993 1997 2001 2004

Dalit 18.0 17.8 12.2 6.7 12.4 12.7 7.1 4.6

Adivasi 9.6 8.9 6.1 3.7 5.2 6.6 3.8 2.6

Non-Dalit/ Adivasi 71.3 72.7 80.7 87.4 81.5 80.1 87.8 90.0

All 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: RBI, Survey of Small Borrowal Accounts, various issues, http:/ / www.indiastat.com. Note: Small borrowal accounts indicate accounts with individual credit limit of up to Rs. 2 lakh since 1999 and Rs. 25,000 previously.

The exclusion of Dalits and Adivasis population from the formal financial system

Amount of credit per capita and number of Small Borrowal Accounts per 1000 persons for Dalit and non-Dalit/ Adivasi population, India, 1993 to 2004

Amount of credit per capita (deflated Rupees)

Number of Small Borrowal Accounts per 1000 persons Caste category

1993 1997 2001 2004 1993 1997 2001 2004

Dalit 495 193 285 225 77 46 37 23

Adivasi 421 200 302 248 84 46 37 25

Non-Dalit/ Adivasi

708 262 756 936 67 41 52 64

All 656 246 651 765 70 42 49 54

Source: RBI, Survey of Small Borrowal Accounts, various issues; Population Census of India (1991; 2001); RBI, Handbook of Statistics on Indian Economy (2006).

Total refinance disbursement to SC/ST population in India by NABARD, deflated figures, 2000-01 to 2006-07, in Rs lakh

0

1000

2000

3000

4000

5000

6000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

SC/ST - Farm sector SC/ST - Non-farm sector

Self-employment generation in India Most self-employment programmes are credit-subsidy

linked.

The role of IRDP in self-employment generation in the 1980s.

The declining role of IRDP in the 1990s, when overall employment generation also stagnated.

Replacement of IRDP and TRYSEM with the SGSY and PMRY.

SGSY has been linked with the SHG movement.

Trends in the shares of budgetary outlays for wage-employment and self-employment programmes in the total outlay for the Ministry of Rural Development, 1990-91 to 2006-07, in per cent

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

Year

Sh

are

of o

utla

y in

pe

r ce

nt

Share of self-employment programmes Share of wage employment programmes

Trends in the budgetary outlays for wage employment and self-employment schemes of the government, deflated figures, 1990-91 to 2006-07

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

Year

Rea

l ou

tlays

(in

Rs

cror

es)

IRDP+SGSY+TRYSEM JRY+EAS+FWP+SGRY+NREGP Total

Credit flow through SGSY and PMRYRefinance disbursement for SGSY and PMRY in India by NABARD, deflated figures, 2000-01 to

2006-07, in Rs lakh

0

5000

10000

15000

20000

25000

30000

35000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Year

Re

finan

ce d

isbu

rse

d (

de

flate

d,

in R

s la

kh)

PMRY SGSY

Number of beneficiaries assisted under SGSYNumber of disadvantaged group members assisted under SGSY, SC, ST and women, 1999-00 to

2005-06

0

100000

200000

300000

400000

500000

600000

700000

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Year

Nu

mb

er

of b

en

efic

iari

es

SC ST Women

Distribution of accounts and amount outstanding related to different government schemes among Small Borrowal Accounts (SBA), 1997, 2001 and 2004, in per cent Item IRDP+SGSY PMRY+SEEUY Others Total

Share of number of accounts (%):

1997 34.6 1.4 64.0 100

2001 18.6 2.4 79.0 100

2004 8.0 2.1 89.9 100

Share of amount outstanding (%):

1997 24.2 2.4 73.4 100

2001 8.4 4.2 87.4 100

2004 3.5 3.4 93.1 100

Source: RBI, Survey of Small Borrowal Accounts, various issues.

Total refinance disbursement by NABARD on all government schemes, deflated figures, in Rs lakh, 1987-88 to 2005-06

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

Year

Def

late

d re

finan

ce (

Rs

lakh

)

There has been a progressive weakening of the public financing of self-employment programmes.

A strategic shift to self-employment, financed by credit, has not taken place.