Abstract:

Banking reforms in India since 1991 were intended to create market-oriented institutional credit driven by profitability and competitiveness. However, rural credit in India under banking reform was characterised by declining agricultural credit and rural indebtedness. The trends in agricultural credit in the post-reform period tend to argue that rather than bringing rural banking closer to the poor, the reforms altogether altered the structure of social banking as it evolved in the pre-reform period. Against this argument, the paper tested the implications of the competitive banking sector under reforms for the availability of institutional credit to agriculture. The analysis rests on the proposition that reforms intended to bring competitiveness and efficiency have led to the neglect of agriculture in bank lending, resulting in farmers depending on informal credit. Burdened with the exploitative interest rates of informal credit, farmers ended up in debt traps and committed suicide. Using the methodology of the Instrumental Variable Approach, we have estimated the relationship between ‘competition’ as a proxy for reforms in the banking sector and the availability of formal credit to agriculture. The study showed that where the banking reforms have brought private and foreign banks in to play a greater role, it has resulted in them not lending to farmers through the institutional credit agencies. The estimation further reveals that reforms have neglected farmers in the lower strata who were not able to get credit on account of their inability to offer collateral to banks for getting loans

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