DAIRY CREDIT UTILISATION AND REPAYMENT IN SHIMOGA MILK ZONE OF KARNATAKA: A comparative analysis of SHGs, Commercial Banks and RRBs

Abstract

Institutional credit has remained elusive for most of the rural borrowers despite many financial inclusion initiatives. Though effort began in the pre-independence period with the establishment of credit cooperative societies, followed by nationalization of banks and establishment of Regional Rural Banks (RRB) in the post independence period, institutional credit has remained inaccessible to major segment of the rural poor due to deficiency in the initiatives. The twin challenges associated with lending to the rural poor - high cost of servicing the loan and risk of default – were difficult to overcome. In this background, the Self Help Group (SHG) - Bank linkage was conceptualized to overcome these challenges. It aimed at providing timely credit to undertake economic activity and thereby facilitate socio-economic upward mobility of the rural poor. However there were many instances of credit diversion to other activity. This phenomenon undermines the underlying assumption of lending, that is, credit will be invested in economic activity which will generate sufficient returns to repay the debt with some surplus to the borrower. With this background study was conducted in Karnataka to examine the utilization and repayment of dairy credit. It was found that on an average only 36% of the dairy credit was used for purchase of animals in the study area. The incidence of credit diversion was highest by SHGs (78%), followed by borrowers from RRBs (72%) and commercial banks (47%). Nearly 21% of the credit obtained by SHGs was used for on-lending to non-members at higher interest rate. Despite higher diversion of credit, repayment by SHGs was about 97%. Banks seemed not much concerned about the utilization as long as repayment was healthy. This may not work for ever, because repayment of previous loan is not a strong indicator of credit absorption capacity. Thus, if utilization of credit is not monitored, chances that SHGs defaulting may not be ruled out. As a result, it is not surprising that some studies have indicated declining trend in repayment by SHGs. Therefore, monitoring credit utilization is crucial for sustainability of SHG-bank linkage.