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Introduction
Credit plays an important role in economic development. It is an important input for productive activity. It helps meet the capital requirements for new start-ups or expansion of existing production lines. It also meets the requirements of ongoing production activity. Besides its role in meeting capital requirements in the productive sectors, credit also plays an important role in day-to-day life, as it helps in consumption smoothening, that is, bridging the gap between present consumption and present income, especially in rural areas. Thus, credit is needed for both consumption and production purposes, by people and organisations belonging to different spheres of the economy.
Studies on poverty reveal that a lack of access to capital – whether monetary, educational or health – is one of the major reasons for continued poverty, especially in the rural sector (Verner, 2006; Hulme et al., 2001; Nadal, 2005). The timely availability of credit in the right quantity and at an affordable cost can help to reduce the high incidence of poverty and, thus, go a long way in contributing to the well-being of the people, especially in the lower rung of rural society. Credit market failures have been identified as one of the key constraints restricting technological improvement in third-world agriculture (Bhaduri, 1983), which can be an important source of improving the standard of living of poor people in a developing country like India.
Informal credit has dominated rural credit in India over the past several decades. Development banking, however, has attempted to reduce the dependence on informal credit. Till the 1990s, the rural financial system in India was predominantly supply driven. The state played a major role in improving the access of financial services to the poor. Financial sector liberalization questioned the efforts of the state with regards to its efficacy and sustainability in providing the required amount of credit for the rural economy. Despite the vast expansion of the formal credit system in India, access to institutional credit by the rural poor has not improved much. It has been argued by many scholars that the recent innovation of microfinance has allowed the provision of formal credit to the rural poor. Although microfinance has been projected as an alternative type of poverty reduction programme, there is little consensus...