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The rural economy can grow only if it has periodic investments made into it. It is this capital which will ensure higher productivity in agriculture. Farmers always have to borrow because the time taken between the time of sowing and actual realization of cash after production is very long.

During the time of independence marginal and small farmers were exploited brutally by the money lenders who lent amounts at high interest rates and lured the farmers into debt trap. In 1969, India adopted social banking and multi agency approach in order to adequately meet the rural credit. This was a major change. The National bank for Agriculture and Rural Development (NABARD) was set up in 1982 as an apex body to coordinate all the activities involving the finance of the rural sector. The Green Revolution also brought in major change in the credit system and it led to the diversification of the rural credit portfolio, making it a more production oriented lending.

A set of multi agency institutions namely regional rural banks (RRBs), cooperative and land development banks for the institutional structure of rural banking today. The multi agency system is aimed at dispensing adequate credit at cheaper rates. The formal credit delivery mechanism has proved to be inadequate and has not fully integrated the overall rural social and community development. Hence in order to fill the gap created by the formal credit delivery system, Self Help Groups (SHGs) have emerged recently. Some collateral was required for getting credit and hence a large proportion of the poor rural households found themselves out of the credit network. SHGs on the other hand promote savings and thrift. They encourage savings in small proportions by having a minimum contribution from each member. The money thus pooled, is then given as loans to needy members with reasonable return rates and repayable in easy installments.

By the end of March 2003, more than 7lakh SHGs have been credit linked. These credit provisions are usually referred to as micro-credit programs. SHGs have also helped in the empowerment of women. The borrowings in SHGs are usually confined to consumption purposes and very little for agricultural purposes.

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