New Approaches to the Financial Inclusion of Small Farmers in India

A seminar on “New Approaches to the Financial Inclusion of Small Farmers in India: Some Experimental Results,” with Dr Dilip Mookherjee, Boston University was held at NCAER. Dr Renuka Sane, an Associate Professor at the National Institute of Public Finance and Policy (NIPFP) was the discussant.

In many parts of India, such as West Bengal, formal credit does not reach small farmers owing to lack of collateral, low banking penetration and the absence of credible targeting of productive farmers. This limits the effectiveness of directed lending programmes in stimulating agricultural growth or reducing rural poverty. Microcredit (e.g., via Self-Help Groups) does not help finance agriculture either, owing to high-frequency repayment requirements, joint liability loans and intensive monitoring.

The paper reports on randomised controlled trials with a new approach in which an agent from within each local community is appointed and asked to recommend high productivity farmers for low interest loans. Agents are incentivized by commissions linked to loan repayments. In the first experiment labelled TRAIL, a private trader/lender with extensive trading experience within the village is appointed. The second approach, GRAIL, asks the local Gram Panchayat to appoint an agent. The performance of these two approaches is compared with the conventional approach to providing microcredit (GBL). TRAIL turns out to be highly successful in raising the output of potatoes, the leading cash crop in West Bengal, and in raising annual farm incomes, both by about 20 to 30 percent. GBL does not have a significant positive impact on either, and GRAIL performs between TRAIL and GBL. All three achieve loan repayment rates of around 95 percent. TRAIL also achieves higher take up and incurs lower administrative costs compared to GBL.

The reasons for TRAIL’s superior performance include better targeting of productive farmers, and motivating them more strongly to improve farm performance. These results suggest that the appointment of private commission agents by formal lending institutions is a promising strategy for increasing financial inclusion.

Dilip Mookherjee is Professor of Economics at Boston University, where he is also the Director of the Institute for Economic Development. He is a member of the Research Panel for NCAER’s India Policy Forum and is also currently the Lead Academic of the India Central Program of the International Growth Centre. He has previously taught at Stanford University and the Indian Statistical Institute, New Delhi. His research focuses on food marketing, land and forest rights, governance, microfinance and financial regulation in South Asia. His books include Market Institutions, Governance and Development (2006) and Incentives and Institutional Reform in Tax Enforcement (1998). He studied economics at Presidency College, Kolkata, and at the Delhi School of Economics, and received his PhD from the London School of Economics.