An evaluation of effective cost of credit in relation to preferences of rural borrowers: A case study of Nagaur district of Rajasthan


Dhanesh Kumar Khatri

The importance of farm credit as a critical input to agriculture is reinforced by the unique role of Indian agriculture in the macroeconomic framework and its role on the poverty alleviation. Recognizing the importance of agricultural sector in India’s development, the Government of India and Reserve Bank of India (RBI) have played a vital role in creating a broad-based institutional framework for catering to the increasing credit requirement of the sector. The crucial aspects of rural financing are (a) providing loanable funds for rural customers, (b) creating access of rural people to financial services which is technically known as Financial Inclusion, and (c) assisting the poor in establishing their own financial institutions thus, rendering them financial independence. The financial requirements can be fulfilled either by the internal sources of the needy (which is limited in availability) or to a large extent, by credit (whose availability can be adjusted according to the requirements). Thus, credit is a more lucrative and flexible source of fulfilling financial requirements. Looking at the importance of farm credit also known as rural credit the ensuing study titled “An Evaluation of Effective Cost of Credit in Relation to Preferences of Rural Borrowers. A Case Study of Nagaur District of Rajasthan “was carried out to address the issues the dynamics of rural credit in rural area of Nagaur district of Rajasthan, understand the various dimensions of rural borrower’s preferences at the time of applying for loan, and evaluate the impact of borrower’s preferences on effective cost of credit. Both primary and secondary data were used to achieve the objectives of the study. The primary data was collected using a judgmental sampling and in total 120 villagers were selected from the study area. The data collected using a structured questionnaire were analyzed using method of cross tabulation and applying appropriate statistical tools and test. The main findings of the study were as mentioned below: The findings of the study revealed that both formal credit sources commercial banks, private finance companies, co-operative banks, and SHG (self-help group) as well as informal credit sources like money lenders ‘mahajans’/’sahukars’ were operating in the reference district. Regarding the preference factor of securing credit the research work helped in concluding that accessibility ranked first preference factor of the borrowers and promptness in getting the loan was the least preference factor. More time granted for repayment ranked second followed by flexibility in obtaining loan. The study revealed that cost of credit from different sources comprised of transaction cost and opportunity cost. The effective cost of credit for the borrowers covered in the study during the study period from commercial bank was 13.40 percent, whereas it was 13.94 percent for a loan taken from cooperative societies, and loan from private finance company was about 18.25 percent, and the effective cost of borrowing from informal sources ‘Mahajans’ was as high as 24.50%. The research work also helped in concluding that the borrowers of the reference group were having highest effective cost of credit (24.50%) to obtain credit for meeting health expenses, followed by social expenses (22.80%), alcohol consumption (18.50%), agriculture purpose (16.55%), household consumption (13.20%) and others was 12.40%. ANOVA test helped in accepting the null hypothesis that ranking difference for different loan preference factor was not significant and all the factors command similar preference by the borrowers.


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