ADB to lend India $ 1 billion to help rural poor

The Asian Development Bank (ADB) has agreed to lend India $ 1 billion – the largest ever advance by the bank to a developing country – to address the issue of widespread suicide by farmers in many parts of the country.

The announcement was made by the bank, December 11, amid concern that failure to broaden the base of India's blistering growth could lead to social conflict, capital flight, falling investment and an economic slowdown.

The loan package will be aimed at weaning the rural poor away from moneylenders by expanding access to formal finance, marking a shift in emphasis towards the social sector for the ADB's Indian loans.

Until the end of 2005, nearly 90 percent of the ADB's loans to India had been invested in infrastructure.

The sum would be routed through NABARD, but subject to the states signing MoUs with the Centre, sources close to the development said. The ADB loan will be incumbent upon improvement in the functioning of cooperative credit institutions. This means eliminating the dual control over the credit societies exercised by respective state governments and RBI. Instead, RBI will regulate the institutions.

Expert panels like the Vaidyananthan Committee has said that the dual control has made these institutions inefficient and so pushed up the cost of credit.

Banking sources said that improving the rural credit is an important component for achieving the financial sector reforms agenda, which the government has set for itself. The funds will, therefore, be a critical component of the government's rural credit intervention programme, in worst–affected states like Andhra Pradesh, Madhya Pradesh, Maharashtra, Rajasthan, Gujarat and Orissa.

In Andhra Pradesh, where moneylenders account for 60 percent of loans to rural homes, 80 percent of farmers are burdened by high debts. Economists believe limited access to credit is a big factor behind the farm sector's declining growth rates.

Stagnation in the agricultural sector has caused its share of gross domestic product to fall to barely 20 percent from 32 percent in 1991, leaving it struggling to provide a livelihood to the two–thirds of India's 1.1 billion population still living in rural areas and provoking large–scale migration to overcrowded and dysfunctional cities.

According to economists, limited access to credit is a big factor behind slowing growth in the farm sector, which provides a livelihood for two–thirds of India's 1.1 billion population.

"For a large country like India, growing at 9 percent, there's no option but to include 700 million in the growth process: it's not a choice any more, it's a necessity," said Ashok Sharma, an ADB director in south Asia. "If not, consensus for reform will evaporate."

Of late, ADB's lending to India has surged. It averaged about $ 600 million a year in the 1990s but increased to $ 1.1 billion between 2000 and 2005 and is to more than double to $ 2.45 billion in 2007 and $ 2.85 billion in 2009.

The government had asked the Manila–based bank for the allocations to supplement its own resources to provide support for the rural credit programme estimated at Rs. 10,000 crore ($ 2.2 billion). The multilateral institution has already committed $ 2 billion to India in 2006. But in the next fiscal it expects to push it up by another $ 500 million. The 15–year ADB package is aimed at addressing the rural urban divide developing in the country, to make available sustainable financial service to farmers.

Reducing rural poverty has been the main policy platform of the Congress–led coalition, which returned to power in 2004 amid discontent at widening inequalities, falling rural incomes and a deepening debt crisis in the nation's 700,000 villages.