4404624

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Designing Financial Services for Rural Poor: Retooling Rural Financial Institutions?Author(s): K. KaladharSource: Economic and Political Weekly, Vol. 31, No. 39 (Sep. 28, 1996), pp. A117-A122Published by: Economic and Political WeeklyStable URL: http://www.jstor.org/stable/4404624.

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esigning

Financial

Services

o r R u r a l

o o r

RetoolingRuralFinancial

nstitutions?

K Kaladhar

Requirementsoffinancial

services

for

poor rural households encompass

consumption smoothening, human capital

formation, production

and investmentcredit

ano4nsurance,

in

addition

to

savings facilities.

While the

informal

sector

provides most of

the

services,

the

formal

rural

financial

institutions have inappropriate

tools and

perspectives in

delivering

the services. Unless

institutions retool themselves

by focusing

on a rural household's

economy

rather

than

limiting themselves

to

activity

linked

lending, they

cannot

be

successful

in

delivery of financial services.

IN

the

recent

past,

hedebateon

rural inancial

institutions

(RFI)

has been

focusing

on

analysing

reasons for 'successful'

performance

f such institutionsmore

from

operational perspectives

and

away

from

macro-economic

variables

Yaron

1992].

In

the 1960s, 1970s

and

1980sanalysis

centred

around

problems temming

rom

ow interest

rates

or

subsidised credit, supply leading

finance, government

owned and

expanded

financial institutions

[Adams

et al 1984].

However, now,

the

emerging

research

on

rural financial institutions

shows some of

the operational elements that

have been

relevantto successful

performance

such as

organisational culture, removing

informational

asymmetry,

etc. In this

paper

it is proposed o examine the developments

thathavetaken

place, synthesise

the

learning

and

develop

an

operational

framework

for

implementation

n

the

Indian

context with

respect to formal rural financial institution

system.

The rural

poor, especially women,

commonlyhaverestricted ccess to financial

services expected

to

be

given by

the formal

rural

financial

institutions. The Indian

perception

has

been

that

due

to lack of

adequate

network of such

institutions, the

inaccessibility

has

been

further

trengthened.

As

a

remedial measure the national

government

assisted

by

donors have

envisaged,

ubstantially

n

large-scale,

orinal

regulated programmes emphasising

more

credit to

poor

in

rural areas.

In

the

process

huge bureaucracy

has

been

built-up

for the

purpose

of

purveying

credit to rural

poor.

The

financial

programmes

aunched

by the

formal institutions had other assumptions

such as a low

rate

of

interest,purpose inked

credit,

formal

project appraisal,etc, with a

view to

reaching the benefits via income

generating activities,

to the rural

poor.

PROJECr PPROACHo LENDING

One of the central

pivots

on

which the

credit

institutions

were

built was the World

Bank's approach o

developing rural poor,

viz, projectapproach.The projectapproach

was layered into

definite sequences with

identification

of the

activity(ies) in the first

phase, followed by formulation,appraisal,

implementation,monitoring

and

evaluation

phases.

This

was called

projectcycle

[Baum

1978]. Projectapproach nvisaged

a detailed

project

appraisal involving calculation of

rates of returnand financing

the best of the

projects

for the

purpose

of

generating

adequate ncome tothe ruralpoor.The focus

under he approachwas more

on the

purpose/

activity thatwas expected

to 'help' the poor

rather han on

the poor themselves.

In the

process,

during the 1960s and 1970s very

many rural

development projects

in terms

of sectors

such as plantation, horticulture,

irrigationdevelopment, animal husbandry

development projects

were

appraised

and

sanctioned

by

the

World

Bank

for

implementation

through

formal rural

financial nstitutions. n

addition,

unctional

areas such

as

extension, credit, etc, also

received

widespread importance.

Among

these

projects,primacywas accorded o rural

credit

projectsunderwhich

the

elements of

projectappraisal

were

subjected

o

analytical

rigour and rates of returnwere calculated

both under

economic analysis as well

as

financial

analysis.

Credit

was to

be

purveyed

undersuch projects o ruralpoor for various'

activities

such as

minor

irrigation, animal

husbandry,plantation

and

horticulture,

tc.

Each

of the

activities was analysed

n

detail

in terms of

costs

and

benefits and

the

rates

of

return

wce

calculated

accordingly.

If the

rates of

return'were bove the given cut-off

point,

then the

projects

were

accepted

for

the purpose

of

financing

under

the

project.

Under the

system, production-oriented

lending

had taken roots with elaborate

sequentially designed procedures being

observed by rural bankers. Some bf the

characteristics that were developed and

stabilised

over

the

years

were

activity/

purpose

centred.

Technically

feasible sizes

were

determined e g, twomilchanimal

unit,

one hectare

plantationof oranges) with the

objective

of

achieving

financial

viability.

Farm

budgets were designed along with

farm

models

containing extensive analysis

on financial

and economic

aspects.

Repayment

would

be fixed in suitable

instalments ver

theeconomic ife of

activity,

after accounting for

grace/gestation

period,

out of the income

generated

because of

the

activity. Thus,

rural financial

institutions

were to

identify activities

keeping

in

view

the

potential of the area, formulate and

appraise

arm

budgets

andfarm

models

(unit

costs),

implement (advance loans)

monitor

and then evaluate.

An

activitywise

area-

wise (villagewise) credit

plan would be

prepared

or the

purpose under

the

dispen-

sation

presently

called 'Service AreaCredit

Plan'. The Service Area

Approachempha-

sised the

projectapproach

at the micro-level

(branch

evel)

with branch

manager

as the

focal

point

for

credit based

development

of

rural

poorresiding

in

the service area com-

prising on an average about 15-25

villages.

Coinciding

with

the

project approach

o

lending, another approach developed

focusing on the role of finance in economic

development,

whereunder the

concept

of

fungibility

of

money

was

propagated

which

theorised that

money

makes

it

difficult

to

pinpointexactly which borrowershadspent

for what. For

example,

a borrowerwho

has

been financed

for.

purchase of

livestock,

perhaps ould

haveused, actually,

he

savings

which he/she has and used the loans taken

under

he

project

or

the

purpose

of

financing

a

wedding

or

any

such

social

ceremony.

Anotheruse for which loan

could

have been

put

to

may

have been immediate debt

payment

or

meeting

consumption

needs.

This was

expected to happen

nspite

of

post-

loan sanction and disbursement

upervision

with a view to ensuring

'end-use' of loans.

The

borrower,accordingly, would perceive

the

loan funds

as

an

additionality o

his

total

budget

and it

would be difficult to

attribute

the benefits to investment in a production

activity

as

envisaged

under he

project

o

the

loan funds

alone.

In

other

words,

as

long

as a rural

household's financial

budget

permitted

epayment, iven

its

priorities,

he

repayment

would occur

irrespective

of

the

success

of

the

investment oan.

In

addition,

it also

pinpoints

the

futility

of

focusing on

income

generation exclusively out

of

the

investment

and

repaymentas a proportion

to the

income

generated.

In

other words, by

concentrating

and

analysing the purposeor

the

activity alone,

the

repayment

need not

occur

[Pischke

and

Adams 1980].

Economic and

Political Weekly

September 28,

1996

A-I 17

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3/7

We will first examine the

impact of such

thinking

at the

macro-level,

i e, at the

level

of World

Bank

which has been

in the

centre

stage

in

propagating

he

projectapproach

o

lending.

The issue of current practices

in

project appraisal

was examined and the

conclusionthat

was arrivedat was we

have

found that the

extent to which (social cost

benefit analysis is)

used

and

(has)

real

influence

is not

great,

even

in the

World

Bank [Little

and

Mirrlees

1991].

This

observation

by

Little and

Mirrlees,

considered hefathers f

the

project

appraisal,

comes

as a

shocking

statementand leads us

to raise two broad questions

[Shantayanan

et al 1995]. (1) What

is

the

proper

role for

project valuation

n today's world? 2) How

can we make the

project appraisal

ensure

high quality

projects?

WhenLittle

and

Mirrlees

wrote heManual

of IndustrialProject Analysis

in

1969,

the

governments

were expanding public

investments

rapidly and

much of that

investment was in industry and related

sectors. During

those decades

there

were

major

distortions

arising

from trade

policy

and exchange

rate

policy

amongst

the most

developing

economies

and

for the

purpose

of

removing

his distortion

he

focus

was on

techniques

such as border prices and

conversion factors.

Another

factor that had

sustained

project

appraisal

n

those decades

was the calculation

of the rate of return or

a

public sector project.

The same technique

also

was

sought

to be

applied

to rural

development projects.

Today,

in the latter 1990s, governments

of the developing

countries

are

reducing

theirrole, going ahead with privatisationof

public

enterprises

followed

by gradual

removalof

distortion

n the trade

policy

and

exchange

rate

systems.

In

addition,

the

concern

now is

focused

on whether

a

project

ought

to be

in the

public

sector

at all or not.

This has ed

to the

posing

of a

counterfactual:

whatwould

he world ook like

in

the absence

of

a

project.

In

other words

wherever there

is a

private

sector alternative to

public

provision, encouragement

should be

accorded to the

private

sector

alternative.

The

World

Bank, thus,

over the

years

is

gradually shifting

from

activity specific

projectappraisalo thatof sectoralandpublic

expenditure

analyses

or what is called

structural

djustment ending.

For

example,

the

agricultural

xpenditure

review of

India

carried

out

by

the World

Bank in

1993

[Pradhan

and Pillai-Essex 1993] examined

several

agricultural

rogrammes

as

projects

and calculated heirminimumrateof

return.

It concluded

that two

programmes

-

a

fertiliser

subsidy

and a

crop production

scheme

-

had

a zero

rate of returnbecause

therewas no ustification or publicprovision

of these goods. Yet the bulk

of the Indian

government' expenditurewas going

to these

two schemes. Interestingly, the study also

pointed to the high rates of return n ground

water irrigation and extension services

recommending a reorientation of public

expenditure n thatdirection.This approach

actually goes beyond setting a good

foundation

or

subsequentappraisal.

t

also

improves the overall qualityof the sectoral

investment programmes.

Concurrent

with the

shift

of

focus

of

the

WorldBankto structural djustment ending

from

project-basedending,

within he

project

cycle therehave been qualitativechanges in

variousphasesemergingwith the expericnce

into 'new' project cycle. The Bank's

evaluation

uggested

hatwhen

development

projectsperformpoorly

it is

usually

for one

or more of

the

following

reasons:

(i)

Beneficiariesdo not

participate ufficiently;

(ii)

borrowersare not committed to

project

goals; (iii)

risks

are inadequately assessed

and

managed;

or

(iv) capacity building

was

separately pursued through technical

assistance programmes,etc. The proposed

new project cycle [Picciotto

and

Weaving

1994]

now has

(1) listening (2) piloting (3)

demonstrating

and

(4) mainstreaming

as

different

phases.

Under

the first

phase, viz, listening,

the

central

role of the borrower and

the

participation

f

potentialbeneficiaries,right

from the start, symbolises the learning

dimension

of

projects

as

against

'identification'

-

a

term suggests

a

visual

selection of

physical goals

or

focusing

on

specific

activities such

as

minor

irrigation,

animal

husbandry,

etc. The second

phase,

piloting,

is

geared to exploring alternatives

identified at the learning phase and

objectively assessing

risks

through

participatorymethodology.

The third

phase

is

demonstrating,e, providingopportunities

to fine tune and

adapt project concepts

to

ensure

a

satisfactory development impact.

The

fourth phase, mainstreaming,

aims at

achieving

the overall

goal

of credit-based

assistance,viz,

institutional

earning

anden-

suring

a

lasting mpact

on the

country'spoli-

cies, practices,technologies

and skills. The

new

cycle

thus

comes to fruition

with

large-

scale

adoption,mainstreaming,

f

methods,

techniques

nd

programmes ioneered uring

the pilot and demonstrationphases.

Another critical

view on

the

traditional

cost benefit

analysis

s seen from ts

inability

in

developing capabilities

of rural

poor

and

building

the same

into

cost

benefit

analysis

as

presently practised [Clements

1995].

The

existing

literature

on

economic cost

benefit

analysis

seeks

to

exclude

the main

factors

that affect the rural

poor

in

terms

of

improvements

n

nutrition, ealth, ducation,

etc.

Under

the

approach

itled

'capabilities

approach to project analysis' (CAPA)

capability is looked at not on the income or

public services, a person has access to, nor

on

the particular

choice,

plans and the

strategies a

person makes but

ratheron the

range of choices

that are

available to the

individual [Sen 1993].

Undernutrition

nd

poor health

restrict this

range of

choices in

a direct,

physiological

manner.Three

kinds

of

information

should be

consideredunder

CAPAfor

indicatingbenefit

evels. The first

is

quantitative

nformation

collected by and

for the

project,

normally on

project inputs

and on

changes

in the

beneficiary

population's capability

standards.Second,

benefit estimates

may

be

assisted

by

outside

studies

bearing

on

the connection

between

project inputs

and population

capabilities.

Third,

here

shouldbe some

scope

for

project

staffand

agency representatives

o

contribute

to

benefit

estimates based on

their

observations and

opinions.

This

suggested

approach,viz, CAPA has

several

problems for

operating bankers

at

the field level.

They

neither

have

time nor

skills for

incorporating

hese

threeelements

into

assessing the credit

demands

and

thereafter taking a

decision

in the

matter.

While

conceptually

the

approach

s

sound,

operationally

t

is

very

difficult o

implement

at the field

level.

The abovedebate

eadsus to the

conclusion

that the World

Bank, from a

commodity/

sector-based

project

lending

approachhas

gradually shifted to structural

adjustment

lending

underwhich

the

macro-economy

as

a

whole is taken

into account for

assessing

the

effectivenessof investment.

Thedifferent

phases

under

the traditional

project

cycle

have

also given

way

to

the

new

projectcycle

with

shifting of

focus from

activity to the

ruralpoorortheparticipantnadevelopment

project.

This

debategives risetothe

question

whether the

shifting

of

focus in

policy

perspective

can be

applied

at the

beneficiary

level

or

at the level

of

the

rural

poor

n

terms

of

looking

at

the

economy

of the

beneficiary.

This means that

instead

of

focusing

on

the

financing

of the

activity

alone and deter-

mining

the cost and

benefits

thereunder,

we

have

to look at a rural

household's

economy

at

the

family

level

and then determinewhat

kind of credit

packages

need

to be devised.

This calls for

having

a fresh look at the

way

the

credit is

seen

from

the

perspective

of

ruralpoor and tailoring financial services

delivery

accordingly.

FINANCIALSERVICES

FROMPERSPEcnvE

OFRuRAL

OOR

In traditional

approach

to rural

finance,

the

production

ide of

rural arm

households

is

generally

seen as

providing

the

logic

for

rural

credit. What is

forgotten

n the

whole

process

is the

poor

household's

demand

or

financial services

relating

to

consumption

smoothening,

human

capitalformation,off-

farm ncome generating

activities,

nsurance

and savings

services [Zeller 1995;

Zeller,

A-1 18

Economic and

Political

Weekly

September

28,

1996


8/11/2019 4404624

4/7

Von Braun, Johm and

Puetz 1994]. In

a

study conducted

for

the World

Bank,

the

natureof demand

for financial

services

by

rural

poor

in

India

was

assessed

through

a

client suirvey Mahajan

and Ramola

1995].

It was found

that in terms of current

usage,

thepriority cross

different

ypes

of financial

services among

the rural

poor

was

consumption credit,

savings, production

credit and insurance. Consumptionconsti-

tutedtwo-thirds

of the credit usage, the rest

being for production

credit. Consumption

included

llness,

householdexpenses during

the

lean

season. Informal

sector

met con-

sumption requirements

at a

high

rate

of

interest,

with

formal

rural

financial

institutionsmeeting

wo-thirds f

production

credit requirements.

The usage

of financial savings is low by

rural financial

institutions with rural

poor

themselves assessing

a

large gap between

their current

savings

and

potential savings.

In

all, savings

accounted for 5

per

cent

of

the

income and about 10

per

cent of annual

creditusage.

The

usage

of

insurance ervices

was very low.

Under

production

credit, many

had

received oans

inked o

government

poverty

alleviation

programmes

uch

as

IRDP

after

accounting

oroutof

pocketcosts, payments

to

middlemen, price

difference of

assets

received as loan

in kind vs

the cash

price

in the

market, wage loss,

etc.

In the

delivery

of financial

services,

the

borrowers

had

opined

in

another

study,

that

the

attitude of

the

banking

officials was

indifferent

o them

[Rajasekhar

nd

Vyasulu

1991

.

That

obtaining

a

loan

is a

complicated

and lengthy process was evident from the

study,

n

addition o the

finding

that he time

taken

o

get

a loan sanctioned

was

inversely

related to the

size

of land

holding.

Added

to

that,

the loan amounts were

inadequate.

It was also

felt,

as a

widespread problem,

that it

was better to obtain

a

loan from

a

moneylender

hanto

go

through

the ordeal

of

bank

procedures Gupta

and

Shroff 19Q0].

In the Indian

context,

provision

of credit

to the

poor

and

marginal

farmers was

constrained

by

lack of

access

in view

of

collaterals,

low interest

rates, leading

to

rationing

of

credit

o wealthy ruralclientele,

followedbyvarioussystemsand procedures

that were

inappropriate

or the rural poor.

The creditneeds of the

poor

as

seen by

them

[MYRADA

1992] indicate

that they require

small but

regular

and

urgent

loans for

consumption

whereas

their

options

were

restricted to IRDP or similar

programmes

designed

and

approved

by

the

government.

Small

loans for

consumption

were

readily

available from

money lenders who also

placed

the

poor on the track of increasing

debt and

bondage

which went rapidly

downhill. On the otherhand,banks were not

willing to lend small amounts

nor would

they entertain oans for consumption, even

though t was obvious that he argestnumber

of loans was taken for

this purpose. The

formalrural inancial

nstitutionsalso could

not give any loans

quickly when needed.

Another practice was adoption of

standardised ost and estimatesoften on the

grounds of feasibility; these amounts were

generally arger

han

requiredby the people.

For example, when farmers in one area,

where the water table was high, needed

approximately Rs 3,000

to

sink an open

well, the bank insisted on providing the

standardrate of Rs

9,000. There

are

other

exampleswhere herequirements erehigher

than the

standardised ost

or

what

is known

in

the banking system as 'unit cost'. There

was, thus,no mechanism o fine tune he size

of

projects and estimates to the micro

situation. This is

relevant

to the

context of

rural household's economy mentioned

earlier. In several

cases

the

schedule

of

recoverydesign by

the

bankdid not conform

to actual

trends

in returns. An

interesting

case of

difference in

recovery

schedules

concerned milch

animals. It

is well known

that

in

the summer the milk

yield falls, yet

the

recovery

instalments

required by

the

bank remain

constant, instead of adjusting

to the

actual trends

n milk

yields.

Another

example

of

inappropriateecovery

chedules

was the

practice

of

linking

recovery

with

harvest imeon

agricultural

oansto

marginal

dry

landfarmers the core of

the

rural

poor.

The

majorityof them consume over 80

per

cent of

theirproduceand could not

possibly

repay

oans from sales of the remainder.

The

scheduleof recoveriescould notbedisturbed

due tochangingsituationsas inoneexample

a memberof

group

tood for

village

elections

who

had borrowed

for

purchase

of a

cow

from the

group;

he

group suspected

that he

would sell the cow to raise funds

for

the

election so

they

seized it

till

the elections

were over.

The rural financial

institutions

were

pre-occupied

with

viability.

For

example providing

a

poor

woman

with

10

ewes

and one ram which

usually

failed

to

earn

adequate

eturns

ccording

o schedules

since

it

pre-supposed

hat the woman was

doing nothingpriorto

his

project.Managing

a 10+1

unit

s

almosta full

timejob requiring

her of giving up other wage opportunities

which

provided

her

daily

needs in order

to

manage

the

sheep

unit.

Thus,

the rural

financial nstitutions

gnoredmanageability

in the

process

of

determiningviability.

The

above illustrations indicate the

inappro-

priateness

of

the strategy

and systems

and

procedures followed by the formal rural

financial

institutions.

APPRoAcH

o

DELIVERY

F

FINANCIAL

SERVICESBY INFORMAL ECrOR

Given the paradigm of rural

poor

perceptions and the inadequacy

of formal

rural

inancial ystems

nmeetingthedemand

with

all its structural

equirements,how the

informal sector,

including the self-help

groups, is catering to the rural

poor is dealt

with below. The

evidence withregard o the

approachor 'how' the

financialservices are

delivered is linked

directly to the

methodology of credit

rationingemployed

by the

informal sector.

The determinants f creditrationing entre

around

informational

asymmetry between

lender and borrower [Stiglitz

and Weiss

198 1 leading o lenders

demanding ollateral

orcharginghigherrates

f interest.

Collateral

requirements ave been identifiedas a

major

determinant f

the enders'decision

to ration

loan

demand

[Binswanger et

al

1989].

Informal

enders

on

the other

hand,

often

use

collateralsubstitute.Third

partyguarantees,

trade contracts and

threat

of

loss of future

access to credit are

common

devices

in

informal

contacts

[Adams

andFitchett

1992,

Binswangeret

al

1989].

In a

study

conducted

in

Madagascar

on

determinants of credit

rationing y

both

nformal endersand

ormal

credit

groups [Zeller

1995]

several

findings

are of

relevance to the Indian context. The

credit

rationing by

informal

lenders was

determined

by age

with older individuals

more likely

to

apply

for

credit,

with

higher

age leading

to

decline

in

credit obtention.

Secondly,

the numberof

years of

schooling

has a

positive effect

on loan

application

since it

augments,

other

things

being equal,

returns on

capital

and

therefore credit

demand.

Thirdly,

the

poor, proxied by

occurrence for

wage income, significantly

rely

on informal credit for

consumption

smootheningwith a durationof two months

which

is

easily obtained

with little

waiting

time.

Fourthly,

t

is

the head

of

the

household

who is more

likely among

the members to

ask for a loan. The fifth determinant elates

to

sickness

leading

to

the

demand

for

credit

for

financing

medical

care. In

contrast to

these determinants which

trigger seeking

credit from informal

lenders,

the

decision

taken

by

the

formal

groups

is

to

approve

a

loan

request

based

on the

health of

the

applicant

household

(which

is

an

indicator

of

repaymentability)

in

addition o

existing

indebtedness

n

the informal ectorwhile

the

outstanding ebt aken rom heformal ector

does

not

impinge

on

the

rationingprocess.

The

pilot project

on

developing linkages

with

self-help

groups currently

under

implementation

in

India

also

gives

useful

insights

into the

rationing process

or

the

methodology

of

appraisalbeing

followed

by

the

self-help groups [NABARD 19951.

The

groups'

initial

source

of

fund

was

savings

supplementedaterby

creditand

he

activities

financed were need

based even

while self-

help groups adopted

a

flexible

approach.

Interest rates charged were varying

and

market-related; shorter repayments

were

Economic

and Political

Weekly September

28, 1996

A-I

19


8/11/2019 4404624

5/7

fixed, as against

the

procedural equirement

of allowing longer repayment period by

formal rural

financial

institutions, keeping

in view all available ources

of income

nstead

of limiting to

income

generated

out

of the

financed activity

alone. This

facilitated

members aking more

than

one

loan during

a year. Flexibility

in

norms of lending

was

observed

on case to case basis

with

less

importance attached

to documentation. In

case of

emergency/situations

of

distress,

a

second loan was also allowed

while the first

loan was yet to be repaid.Penal interest for

delays

n

repayment

f instalmentwas

applied

flexibly. Meetings

of

groups

were conducted

regularlywhich served as a formal base for

exchanging information,

completing

documentation,

etc.

In the context of

the

above it

is useful to

look into the

totally

new dimensions thrown

up

in

respectof Bangladesh

Grameen

Bank,

a

formal

rural

financial institution,

in

managing credit for the rural poor and the

reasons for its success [Jain 1996]. The

study,startlingly,

ndicates hat he Grameen

Bank

in

practice

does not enforce

its

acclaimed

policy

of

making

five-member

groups ointly responsible

for

repaymentof

loans.Contrarily, he success of theGrameen

Bank

was posited

o a combinationof several

organisational olicies

which

were

designed

to steer the behaviour

of its large number

of functionariesndborrowers

long

a credit

responsive

mode . The elements of credit

responsive

mode

centred around

various

organisational

levels and

at

each level

different credit

responsivepaths'

have been

taken

ensuring

in

an overall

context,

the

success of the bank.Atthelocal village level

the

banks credit

policies provided

a set of

neoclassical dis)incentives

to

align

the

self-

seeking

behaviour f borrowers

long

a

credit

responsive path.

The

important

activity

of

group/centre

was meant o

develop

a culture

wherein both members and the bank

functionaries followed the bank norms

implicitly

and

as a

matter of

routine. The

main

purpose

and function of

the

groups

andcentres

was to foster this culture

by

enabling

routine

repetition

of

ideological

behaviour

by

all

the

members

week

after

week,

52

times a

year

which made it a

'culturalhabit' for each individual o follow

bank norms.

In

respect

of branch

operations

as

well as

at the level

of area

office

the characteristics

that

were observed related to

routineness,

reliability

n service

delivery,

demonstrable

honesty

and error-free

performance

in

additionto

repeatedsupervision

and cross-

checks.In

summary,

n

developmentbanking

not

only

do the determinants of borrower

members'behaviourhave to be in

place,

but

the determinants/stimulants of bank

functionariesperformancealso have to

be

properly ligned.The GrameenBank hrough

its staff incentive policies could

broadly

align

its staffs'

self-seeking

behaviour

with

the bank's norms.

SUCCESSFUL

FIS

FROM NDONESIA

The relative success in the

provision

of

financialservices to the ruralpoor, ndicated

by Indonesian experience (Chaves

and

Gonzalves-Vega 1996],

is also

noteworthy

fortheIndian ontext.Thevarious ndonesian

RFIs have

fostered

ntensive inter-action

of

two types of agents, viz, those who

have the

information and those

who

have

the

resources, in the provision of financial

services to the ruralpoor.Such inter-action

has

been

at the

foundationof the

success of

the

Indonesian rural financial institutions.

The individualised

approach

nstead

of

the

group approach

n the context of Indonesia

proves that joint liability or peer pressure

wouldresultinextracosts,andmoral

hazards

forthe

groupmembers, eading

o

borrowing

on individual basis. This was also

proved

in the

case

of

GrameenBank example cited

above.

All the

steps necessary

to

complete

the

financial

ransaction

re undertaken

ocally.

In most cases

the

client

does not have to

leave his/hervillage. Further,ocal decision-

making

and

character-based ending

(when

no collateral s required)allow for the

rapid

disbursement

of

loans. Most of the time

funds are

available

when

needed,

with no

particular restrictions on end use. Most

importantly,

oans are

granted

on individual

basis.

To

overcome information

asymmetry

which is the heart of the rural financial

market

problem,

he Indonesian

xperiment

resolved

through

a

system

of

incentives

(performance-based

remuneration and

efficiency wages

as

compatible

incentives)

that has

induced a

behaviour

on

the part

of

RFI

managers

consistent with the financial

health

of the unit.

The role of credit and credit

institutions

in augmenting

productionandproductivity

is

well recognised.This approach

asresulted

in an

impressive growth of rural

banking n

India over the last four and a half

decades

in

terms of outreach, credit

disbursement

and

support

to the

poverty alleviation

programmes.

However,

the

emphasis

throughout

has

been on

achieving

certain

quantitative

argets eading to

loan

defaults

and

virtualerosion of

repayment

thics. The

end result was the

disturbing growth

in

overdues

which

not

only hampered the

recycling

of scarce resources of banks but

also affected

the

profitability

and

viability

of

the

financial institutions.

Outof the 369 districtcentral

co-operative

banks, only

171 were

operating

n

profit

as

on March

31,

1994. The

overdues

atRs

3,874

crore

constituted

33

per

cent of

the

demand.

As

regards

primary agricultural

credit

societies

(PACS),

out of

90,783 units, only

52,211

(58 per cent)

had been identified as

being

viableas on March

31,

1994. Overdues

of PACS at

Rs

3,875

crore constituted

38

per

cent of their

outstanding

loans. The

picture as

regards

the

regional rural banks

(RRBs)

was no better.

During

1994-95,

32

RRBs had made

profit

while

164

RRBs

showed a loss

aggregating

Rs 423.21 crore.

The annual loss increased from Rs

94.05

crore in

1991 to Rs 425.65 crore in 1994-

95 while the accumulated osses of

RRBs

aggregated

Rs

1,686.61

crore as on

March

31, 1995

(C Rangarajan

First Ravi Mathai

Memorial Lecture

1996). Similar data for

ruralbusiness of commercial banks is not

available.

The characteristics

n

terms of internal

practices

and

attitudes

among

rural

inancial

institutions ndicate that

they

are not

suited,

structurally,

or the

delivery

of

the financial

New

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AStudy fBritish istoriansnIndia

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Weekly September

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1996


8/11/2019 4404624

6/7

services to

the rural

poor

[Mahajan

et al

1995].

Few

products

suit rural

people's

special needs

on the dimension

of

urgency,

informality, seasonality, illiteracy

and

diversity

n

ivelihood.

No

consumption

oans

are

given

while

lending

is

security-based

with the insistence

on collaterals.

Largely,

one time loans are given

with the

poor

seen

as a social obligation

and

intrinsically

unworthy of credit.

The financial ectorreform

hat s

currently

underway ncompasses

he

nstitutional

ural

credit

delivery system.

As

part

of the

measures ecapitalisation

s

being

undertaken

alongwith

other measures

such as

development

action

plans, coupled

with

memoranda

f

understanding

orthe

purpose

of chalkingout action-oriented trategies

or'

revitalising the institutions.

However, little attentionhas been paid to

the

rigid

frameworks

that

have

permeated

the rural financial institutions.

This

is

evidenced

from

the

perspectives

of rural

poor

with

regard

to

credit.

One

point,

a

central one at that, of importance in the

reforms

process

in

respect

of

rural

inancial

institutions

s

that unless

the rural

poor are

responded to properly

the rural financial

institutionswill notbe ableto

trigger equired

impulses

and

maintain

hemselves as vibrant

and healthy institutions.Time

has

come

to

recognise

limits of credit as

against

credit

limits

[Dandekar

1995]. Based on the

experiences

outlined

above

what

is

required

is

retooling

of the rural inancial nstitutions

rather

han

tinkering

at the

periphery

n the

name of

reforms.

In addition to the above the Indian rural

credit ystem scharacterised ycertainrigid

frameworks which are

inhibiting perfor-

mance

compared

o that of informal sector.

Theelements

hat

characterise

he framework

and

simultaneously

nhibit the

performance

are: unit

costs, repayment periods, grace

period

and/moratorium

period, looking

at

the

activity,

and

confining

one-self to

the

income

generation and

unit cost from

the

point

of view of

activity

alone.

If

one has to learn the lessons from the

practices being

followed in the credit

management roups

or nformal

enders

what

kind of

procedural hanges

can be made

so

as tobring nthe elements of GrameenBank

as

already

discussed

coupled

with

the

effectiveness of

the

informal sector? It

appears

that

the

present activity-based

financial

relationships

need

to

be

given

a

go-

by

so

as to overcome the structural

igidities

in

approach

o

rural

inance. In the

informal

sector the lenders

always

look to

the

individual

and

take

a

holistic

view of the

cash flows

that are

being generated by the

invidual. In

this

context, it is useful to recall

what was alreadydiscussed here with regard

to changes in the learning pattern of the

World Bank from that of specific

project

activity to

that of structural

adjustments

lending. It is also useful to recall the present

rethinking hat s occurring n respect of

the

project cycle approach rom the traditional

phases of identification, formulation,

appraisal implementation, monitoring.

and

evaluation,

to

give importance

to

the

'process' by focusing

on

(a) listening, (b)

piloting, (c) demonstrating

and

(d)

mainstreaming.

Under

this

process

the core focus is

on

developing

and enduring relationship

between the lender and

the borroweron a

long-term

basis rather han

seeking

it as a

one shot

lending approach.

In

the

light

of

the

above

the rural bankers should now

realign approach to rural financing

whereunder the rural family or the rural

household

is

taken as a unit for

the

purpose

of holistic

analysis

of its

micro-economy.

A rural household or a rural individual

will be the

focus for delivering financial

services.Financial erviceswouldencompass

different requirements

as

seen

from the

householdperspectiventermsof investment

credit, production credit, consumption

smoothenilig, human capital formation,

insurance nd astbutnot he eastappropriate

savings products.

The nformational symmetrybetween he

financial nstitutionand the ruralhousehold

can be overcome

by developing long-term

and

enduringrelationships.

For

the

purpose

the present

methodology

of

doing banking

from the branch

premises

need to be

reoriented.The

branchmanagerassisted by

his

staff shall haveto visit each of the

villages

under

his service

area

regularly

and deliver

financial services at the village itself. The

visits may be such that each

of

the

villages

are

visited at least once

in 10

days during

which

time

he must mobilise both

savings

as well

as disburse credit.

In

the

initial

stages, say

first

six

months

or

one

year

he branch

manager

hall

dentify

about 100-200

families

in

a

village

and

develop

documentation

on

each of the

families

with

regard

o the

familyeconomics,

the assets and liabilities

position including

debts

owed to informal sector. This is

to

be

done

simultaneouslyalong

with

mobilising

savings

from the rural households.

After the bond is establishedbetween the

branch

manager

and the

family,

credit

requirements on an overall

basis

can be

ascertained and

revolving

credit

facilities

can

be

grantedkeepingin view

the

quantum

of

requirements.

While

granting revolving

credit

facilities the

distinction between

production

reditand

nvestment reditshall

be

dispensed

with.

The activities that the

borrower

roposes o take

up

shallbe

assessed

by

the

borroweror the rural

household

tself

and

amountsof loans

arrivedat

taking

into

account consumption smoothening,

human

capital

formation, etc. No unit cost for

investment reditor scale of

finance n respect

of production redit shall be

applicable.The

repayment chedule shall be drawnup with

weekly instalments and

each of the

instalments

shall be collected during the

visits by

the branchmanager o the village.

The family credit

plan under

implementation under IRDP

needs to be

distinguished

from the

approach

uggested

above. The

emphasisunder he family credit

plan

continues to be 'lending' for two or

more

activities expectedly bringing the

family above poverty line without

looking

into the compulsions of a rural

household's

economy.

The

approach

n

other

wordswould

be in consonance with

the clientele

requirements

with the

rural

householdsbeing

the central

focus.

With a view to

operationalising he rural

household approach

o financial services

a

beginning

can

be made by

selecting

4-5

districts in India

involving

the

rural and

semi-urbanbranchesof commercial

banks,

the branchesof

RRBs

as well

as

the

ground

level units of the co-operative banking

system. For

the last

50 years we have been

in the

first phase

of

the

new

project cycle,

viz,

listening. Having done that, it is rather

overdue for

getting

into

the

second

phase

of the new

project cycle, viz, piloting. It

would be

appropriate hat at the earliest,

action is

initiated

by

the

government

and

other connected

actors

and

pilot stage

is

launched without any further

delay..

TOWARDS CONCLUSION

In the

context

of

the

problemsbeing

faced

by the rural financial institutions, both

endogenous

and

exogenous,

andwith a view

to

improving

he

delivery

of financial

ervices

to the rural

poor,

several measuresare

being

taken for

improving

the

system.

In

addition

to financial sector reformsat the

operational

level

linkages

with

informal sector in the

form

of

self-helpgroups

hasbeen

established.

The

developing

of

linkages

with

self-help

groups

which started on a

pilot

basis

sometime

ago

has now been extended all

over

India

[RBI

96] in terms of the

recommendations

of

the

working group

set

up

to examine the issues on the

subject.

The

mandate to extend the linkage project has

however,

been seen from

the

point

of view

of

including

he

lendings

to

self-help groups

under

'priority

sector' and

building up

a

database

on

the

lendings

through

a format.

Unfortunately,

one of the indicators hat is

missing

n

the format elates

o

data

regarding

savings

mobilisation which is

the basis for

linking with

self-help groups.

Several

proposals

have been made elsewhere

for

expanding

the

linking process

in terms

of

improving

the

resource base

of

self-help

groups, operational

takeovers'and making

the

self-helpgroupsagentsof formalbanking

Economic and

Political

Weekly

September

28, 1996

A-121


8/11/2019 4404624

7/7

system [Kaladhar1995]. Coterminous

with

such efforts there is

a

need for change from

within in respect of rural financial institu-

tions and the changes if not in terms

of

attitudes,have to come

by taking the rural

household as the central

point for delivery

of financialservices. By moving away from

activity-based lending

approach to

rural

household-based continuous financial

relationship oundation

he strengthening f

rural financial institutions is expected to

happen on a more qualitative footing.

References

Adams, D W,

D H

Graham

and

J

D

Von

Pischke

(eds) (1984): Undermining Rural

Development

with

Cheap Credit,

Westview

Press, Boulder Co.

Adams, D

W

and D A Fitchett (eds) (1992):

Informal

Finance

in

Low-Income,

Westview

Press, Boulder

Co.

Baum,WarrenC( 1978): ProjectCycle', Finance

and Development,December.

Binswanger,

Mclntire

and Udry (1989):

'ProductionRelations n AfricanAgriculture'

in P Bardhan

(ed),

The Economic

Theory

Agrarian Institutions,

Clarendon

Press,

Oxford.

Chaves, Rodrigo A,

Claudio

Gonzalez-Vega

(1996):

'The

Design of Successful

Rural

Financial Intermediaries: Evidence from

Indonesia',

World

Development,

Vol

24,

No

1,

pp

65-78.

Clements,

Paul

(1995):

'A

Poverty OrientedCost

Benefit

Approach

to the

Analysis

of

Development Projects',

World

Bank,

Vol

23,

No

4, pp

577-92.

Gupta,

Anil and Manu Shroff

(1990):

Rural

Banking Learning

to

Unlearn:

An Action

Research

Enquiry, Oxford and

IBH

Publishing,

New

Delhi.

Jain, PankajS (1996): 'Managing

CreditForthe

Rural Poor: Lessons from the Grameen

Bank',

World

Development,

Vol

24,

No

1,

pp 79-89.

Kaladhar,

K

(1995):

'Self

Help Groups

-

The

Next

Stage'

CAB

Calling,

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18,

Nos 3

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4, July-December.

LittleandMirrlees(1991): 'ProjectAppraisal nd

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Mahajan,

Vijay

and Ramola Bharati

Gupta

(1995):

'Financial Services for the Rural

Poor and Women in India Access and

Sustainability,

Asia

Pacific

Rural

Finance,

July-September.

MYRADA

(1992):

The

Myrada

Experience-

Alternate

Management Systems or Savings

and Credit

of

the

Rural

Poor, June.

Picciotto,

Robert and

Rachel Weaving (1994):

'A New

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Cycle for the World Bank',

Finance

and

Development, December.

Pischke,

J

D,

Von and

Adams,

W

Dale

(1980):

'Fungibilityand the Design and Evaluation

of

Agricultural

Credit

Projects',

American

Journal

of Agricultural Economics, Vol 62,

No

4

(November) pp 719-26.

Pradhan, anjayand Jeevan PerumaPillai-Essex

(1993): 'India:

Public Expenditure Review

Sector'

Report

IIL

Agriculture'.

World

Bank,

South

Asia

Region

Washington,

DC.

RBI (1996): Circular

ssued by Rural

Planning

and Credit

Department, RBI,

RPCD,

No PL BC

120/04.09.22/95-96 dated

April 2,

1996

-

Linkingof

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Working Group

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Self-HelpGroups Recommendations

follow-up.

Rajasekhar,D and Vinod Vyasulu (1991): 'The

Rural

Credit Delivery System: A

Study

in

Pali

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n

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the

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Sen,

Amartya 1993):

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ndWell

Being'

in

M

C Nussbaumand Sen

(eds),

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Quality

of Life, Oxford Clarendon Press.

Shantayanan, Devarajan

and

Squirelyn,

Sethaput

Suthiwart-Narurepet (1995);

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at the

World

Bank',Policy

ResearchWorkingPaper1496

World Bank.

Stiglitz, J E and A

Weiss (1990): 'Credit

Rationing

in

Markets with Imperfect

Information',

American

Economic Review,

Vol 3, pp 351-66.

Yaron, Jacob (1992): 'Successful Rural

Financial Institutions'

World Bank Discus-

sion paperNo

150,

World

Bank, Washington,

DC.

Zeller, Manfred

(1995): 'Determinants of

Credit Rationing: A

Study of Informal

Lenders and Formal Credit Groups in

Madagascar',

World

Development,Vol 22,

No 12, December.

Zeller, Manfred, (1995):

'The Demand for

Financing Services by Rural Households

-

Conceptual Framework

and

Empirical

Findings', QuarterlyJournal

of

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Johm,

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January.

CENTRE FOR STUDIES IN SOCIAL

SCIENCES,

CALCUTTA

CULTURAL STUDIES

WORKSHOP

The Centre for

Studies in Social Sciences, Calcutta, will hold its

annual

All

India

Cultural Studies Workshop on

1-5

February 1997

in Gwalior. The

theme

for

this year's workshop is Culture and

Democracy in which the focus will be on

contestations over identity,

autonomy and

equality

in

the fields of cultural production in India.

The

workshop is intended to give young

researchers the opportunity

of intensive

discussion of their work

with

senior scholars. The faculty

will include distinguished scholars from India

and abroad.The CSSSC

will bear the expenses of travel within India

for all participants and

will

extend full

hospitality

to

them

in

Gwalior.

Post-doctoral

scholars

or

those

in

advanced stages of doctoral work

and

preferably

under the

age

of 35 who

wish

to

join

the

workshop

may apply

with

c.v. and

a

description

of

their

current

research.

Applications are to be sent by November 30,

1996 to the Registrar,

Centre

for Studies in

Social

Sciences,

Calcutta,

10 Lake

Terrace,

Calcutta

700029.

A- 122

Economic and

Political Weekly

September

28, 1996

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