What are the limitations of rural credit in India?

Question

Accepted Answer

The RBI has observed four major weaknesses of rural credit:

1. Weak recycling of credit.

2. Poor deposit mobilisation.

3. Ineffective lending.

4. Poor loan recovery.

Owing to these weaknesses, state governments are forced to use their funds unproductively. Still, the quality of credit has not improved; credit flows to agriculture have been region-dominated and the performance of Rural Financial Institutions (RFIs) is far from satisfactory.

The RBI gives three reasons for such a performance: (i) low absorptive capacity in rural areas, (ii) high transaction costs, and (iii) greater risks.