Innovative approaches for rural retail lending in Tamil Nadu

Abstract

The objective of the study is to understand the lending methods currently followed by the banks in the rural retail sector and suggest innovative methods to improve the share of formal credit in the total indebtedness in this sector. Since India presents a varied situation, we have taken Tamil Nadu as a case in point and focused on Dharmauri district for the purpose of this study.

We conduct a literature survey starting with the importance of credit and banking for the rural sector. A positive correlation between the rural banking and rural poverty reduction is established. Then the current penetration levels of formal banking are examined based on the National Sample Survey data. The penetration levels in Dharmapuri district of Tamil Nadu are assessed based on the relevant data. The drawbacks of the current approach taken by the banks and the different ways in which banks fulfill their priority sector lending requirements are discussed. A case is made for the ‘obligatory approach’ taken by the banks. The problems faced by rural poor in accessing formal credit are identified with emphasis on the relevant data pertaining to Dharmapuri. The category of needs addressed by the formal and non-formal sectors are identified with a view to find the reason behind the prevalence of non-formal credit in the rural sector. The unmet needs of the rural sector, from a formal credit point of view are identified and a case is made for meeting these needs. The problems associated with addressing these needs are discussed. Dharmapuri district is profiled in terms of major crops and other means of employment. The needs of the rural sector are assessed with reference to the data on indebtedness for the district. The extent of penetration of the formal credit and the specific needs unmet by the formal credit are assessed. The innovative approaches taken by the formal sector to rural retail lending are discussed based on the relevant literature. The suitability of the innovations in the current context is examined. Some innovative approaches to lending in Dharmapuri are suggested based on the identified needs of the rural sector in this area. The feasibility and problems associated with each of the suggested approaches are discussed in detail.