A breakdown of the rural credit ecosystem
India experienced the highest rise in poverty in 2020. The pandemic and it’s resulting lockdown measures contributed significantly to massive increase in the number of people living in poor conditions.
“It is important to understand that we work hard and can only hope for the best. In our business, there are several factors we cannot control. We work hard in growing these crops, however, we may not reap the best harvest due to several climatic changes and natural conditions. Sometimes our harvests prosper. Sometimes it fails. And fails again. It is a gamble.”– Asha, Karnataka, Vrutti
Since rural livelihoods are still primarily dependent on agriculture and its allied activities, restriction in movement affected both the supply of finished products as well as the demand for them. The fortunate ones began storing their produce, awaiting regular prices. However, the unprivileged ones were forced into distress selling. Our partners helped us reach thousands in need for immediate credit. Discussions with our partners, borrowers and field associates helped us understand the sources of credit in these communities. Here’s a short note on the same.
Lack of access to adequate and timely credit
Money Lenders/ Land Owners
“Gradually, they own our means of livelihood.”– Anu Devi, Orissa – Harsha Trust
Common stakeholders in rural credit are money lenders and land owners who have amassed wealth over the decades. These money lenders play a crucial role in providing immediate funds during contingent times. Interest rates on these loans vary anywhere between 5% to 40%, depending on the loan amount and the collateral provided against the loan.
Anu Devi explains that the collateral collected are usually daily use items such as cycles, copper utensils, tools, livestock and in some rare occasions, gold. These local creditors keep these collateral items until the loan amount is repaid. Incase of default or delay in repayment, moneylenders claim ownership of these items. The problem arises as these items are usually daily use items which are necessary for their tradecraft/livelihood. Secondly, money lenders leverage illiterate borrowers into paying them larger than agreed interest and/or transferring ownership of collateral using a false claim.
“We were lucky, the money lenders in my community seem to understand our plight, especially during the pandemic. Usually, they are relentless in figuring out new ways to ask for repayment. But these days, they seem to understand that we have nowhere else to go for money. It’s difficult when you borrow from a nearby village. Money lenders there don’t seem to have any compassion for borrowers from another village.”– Asha, Karnataka – Vrutti
Formal institutional credit
Our borrowers explain that they experience similar exploitation from both formal and informal sources of credit.
Banks offer secured and unsecured loans. However, our rural borrowers find the process lengthy and unapproachable. Many rural borrowers do not have the right documentation required for a successful loan application. Other times, mistrust fueled by illiteracy and exploitation makes vulnerable rural borrowers less dependent on formal sources. Several farmers have been victims of elaborate scams, losing their entire life savings within seconds, while they thought they were taking cautious decisions by trusting a ‘formal bank’.
But their difficulty doesn’t end here.
“On the other hand, formal institutions have extremely lengthy processes. For small scale farmers like me, who are illiterate, the process seems futile. We reach the bank branch with documents, yet they send us back requesting us to provide them with other documents. Sometimes, if we don’t have these documents such as an Aadhar Card, then a bank is not a source of credit for us.”– Anu Devi, Orissa
Self – Help Groups (SHGs)
Self-Help Groups in these localities must be connected to a bank. SHGs provide smaller sized loans to these villagers. When they need larger loans, these groups are forced to bring all their members as signatories to the bank at the same time. Now, an SHG could have anywhere between 8 to 15 women, running household activities and working on their livelihood. Members face immense challenges in funding and managing the logistics to travel to the nearby bank branch. Usually, only to be sent back as a result of mis documentation and distrust. Multiple defaults seen in SHGs raise questions regarding the credit worthiness of SHG loan applicants in general, thereby eliminating access to credit to a community with a lesser default rate.
We collected data on the sources of credit from 10 of our partners across India. Data substantiates our borrower experiences. Across India money lenders tend to collect higher rates of interest in comparison to formal sources of credit. They also provide last mile reach and immediate credit for all of our communities. As represented by the graphs above rural borrowers most often depend on money lenders as they usually provide credit within 7 days. Formal sources that are reliant on banking services usually take anywhere between 3 to 6 months for loan disbursal.
As I write this piece, I can understand and picture this messy interdependency between the limited sources of credit and the multiple layers of vulnerability the rural credit system faces. As Anu Devi rightly pointed out, ‘we look for credit with the hope of fulfilling an opportunity, but with the fear of being exploited’. To several of these communities, Rang De loans are a tiny shred of hope to break out of this cycle of indebtedness.
Rang De’s loan structure aims to address these challenges. We encourage our borrowers to only apply for the needed amount, after thorough consideration of their income and expenses. We provide interest free and low interest livelihood loans after every applicant undergoes a financial literacy module. We promise to disburse the loan amount within 30-45 days.
Help Rang De reach out to more rural farmers, by investing in them. To know more visit https://rangde.in/how-it-works, https//rang or write to us at email@example.com. To meet and interact with our borrowers, join our Impact Dialogues – a fortnightly event where social investors and borrowers come together to discuss rural credit. Drop us a mail indicating your interest and we will loop you in.