Rural finance and research - for rural development

Tara Nair

The rural financial system is constituted by formal and informal organizations. The formal sector has adopted a multi-agency approach and includes the co-operatives, commercial banks (CBs) in both public and private sectors and regional rural banks (RRBs) (which were specially created in the 1970s to cater to the rural sector). The informal sector consists mainly of rotating savings and credit associations (ROSCA), traders, merchants, contractors, commission agents, local moneylenders etc. The former is governed by the existing rules and regulations in the financial sector, whereas the latter largely functions in an autonomous fashion with its own norms, rules and discipline. Since the early 1990s microfinance institutions (MFIs) emerged as distinct entities that provide small loans to the poor and low income households mainly to help them start and run small income generating activities (Nair, 2010). Under the programme launched by the National Bank for Agricultural and Rural Development (NABARD) in the early 1990s, the self-help groups (SHG) of poor women are formed by NGOs, banks or government agencies and linked with formal banks. The banks extend loans to the groups against their savings. These entities positioned themselves conspicuously in the rural financial landscape since the 1990s aided by enabling banking directives from the Reserve Bank of India and patronizing support from donor organizations and commercial banks. The RBI stipulation, subsequent to nationalization, that CBs should earmark at least 40 per cent of their advances for the priority sectors (of which 18 per cent should be for agriculture and 10 per cent for weaker sections) was an important step in the direction of asserting the developmental role of banks. Targeted lending under the priority sector
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norms for agriculture (18% of net bank credit) remained the single most important banking initiative focused on the rural sector between the mid-1970s and late 1990s. During the period between 1992 and 2010, there was an absolute reduction in the number of rural branches of commercial banks by about 2740 branches (RBI, 1996; RBI, 2011). Opening of new rural branches has been at a much less pace compared to that for urban (population between 100,000 and one million) and metropolitan (population above one million) branches. The share of the rural branches in incremental credit and deposits did also not keep pace with the impressive expansion overall, particularly, since the second half of the first decade of the 2000s. It must be noted that the drastic reorientation in the pattern of growth of commercial banking in early 1990s coincided with the beginning of the era of macro economic reform and restructuring.

Innovation in Rural Finance: Formal Banking Sector Despite significant improvement in the quantum of credit flow to the rural and agricultural sectors, precious little could be achieved by the formal sector in designing novel credit products that suit the actual needs of the rural sector. Among the problems were: (i) narrow definition of products to cater to the investment profile of specific activities within given sectors without taking into account the interdependence of economic activities (for instance, exclusion of maintenance cost from the component of investment credit or production credit); (ii) separation of firms need for investment/production credit from investors need for consumption credit on the assumption that they are independent and their mixing up will adversely affect the economics of the firm; (iii) limited efforts to extend institutional support to cover the consumption credit needs; (iv) multiplicity of credit agencies (as also credit packages), terms sanctioning procedures which increases the cost of transaction for the borrower (Samantara, 2010).
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A notable innovation in integrating credit products came in 1998-99 in the form of the Kissan Credit Card Scheme. The KCC combines the features of a credit card and that of cash credit facilities offered by banks and involves three different sub-limits for borrowing to meet production, assets maintenance and contingency needs. It enables farmers to enjoy the benefits of a revolving credit system with unlimited withdrawals and repayments. The greatest advantage of the product is that it allows the farmers to enjoy the benefits of a single line of credit through a single window to deal with their short term production needs as well as their immediate consumption needs. As of March 2009, the KCCs were associated with close to 50 per cent of the operational holdings. Revival of the short term rural cooperative credit system is the other important initiative made by the state to revitalize agricultural and rural credit. Designed in 2006, the revival package with major focus on recapitalizing and capacitating the primary agricultural societies (PACs) is being implemented in several states.

Informalisation of Financial Services The trend towards informalisation of financial services, directed at the low income and poor categories in the rural sector, started in the early 1990s. NABARD piloted a

programme in the south of India to study the feasibility of using self help groups (SHG) of poor people as the basic units of financial intermediation. This programme, which came to be christened as the SHG-bank linkage programme (SBLP), created a new paradigm in the social banking experiments in India. A parallel development was championed by NGOs in directly servicing poor households with money borrowed from banks or mobilized as grants from donor agencies. These NGOs emerged eventually as a distinct set of financial intermediaries unregulated and working within the not-for-profit institutional format. Both the approaches gained currency as significant development models through the 1990s and 2000s. While the SBLP was co-opted by the state governments and some corporate firms, the microfinance intermediaries on their part grew impressively in terms of portfolio size, client outreach and profitability, mainly with the help of borrowed funds. Many decided by the mid-2000s to become outright for-profit entities by transforming themselves into nonT555

banking finance companies (NBFC). Thus they came under the regulatory purview of the Reserve Bank of India.

Fig 1. Formal sector R&D architecture

Research on Rural Finance: The Formal Sector Architecture Substantial chunk of the research relating to rural and agricultural credit in India comes out of the research departments of both NABARD and RBI that undertake research mainly to provide policy input to the management with the help of in-house research. The Department of Economic Analysis and Policy (DEAP; established in 1959) and Department of Statistics and Information Management (DSIM) within the RBI are mandated to undertake policy-oriented research activities for the benefit of the top management and operational departments of the Bank. They also engage in empirical research on the critical economic sectors based on primary data. RBI also funds external research.

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Apart from housing DEAP and DSIM, RBI has created four research and training institutions: (i) (ii) (iii) (iv) Indira Gandhi Institute of Development Research (IGIDR), Mumbai; National Institute Bank Management (NIBM), Pune; Indian Institute of Bank Management (IIBM), Guwahati; Institute for Development and Research in Banking Technology (IDRBT), Hyderabad. In 2009-10, the financial support to the first three institutes amounted to Rs. 28 crore. NIBM has undertaken studies in areas like rural and agricultural lending, strategies for developmental finance, special problems of backward regions, strategies and systems of developmental assistance to weaker and backward sections of the population etc. The Bank promotes external research support through different means like Endowment Scheme, financing of projects, funding of seminars/conferences/ workshops, financial support to research journals and scholarships for faculty members from academic institutions. Based on the recommendations of the Expert Committee (Chairman: Bimal Jalan) that examined aspects of RBIs financial support for research, it has been decided that research undertaken by the external experts under the corpus fund must focus on issues and challenges that are of immediate relevance to central banking. The Department of Economic Analysis and Research (DEAR) of NABARD is mandated to conduct niche projects and studies that can help accelerate development of rural areas by highlighting issues related to agricultural markets, rural infrastructure and non-farm sectors. The NABARD Act 1981 provides for a Research and Development Fund (worth Rs. 50 crore at the end of FY 2009-10). One of the major objectives of this Fund is to facilitate in-depth and applied research in the fields of agriculture, rural banking and rural development which in turn would inform policies relevant to agriculture and rural development. As on 31 March 2010 the cumulative assistance, extended to research and development activities from this Fund stood at Rs.118.52 crore. During 2009-10, grants to the tune of Rs. 1.37 crore were sanctioned for nine research projects. As per the NABARD Annual Report 2009-10, of the total expenditure of Rs. 9.83 from the Fund in 2009-10, 82
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percent was incurred on training and summer placements, and only 10 per cent on research studies. In 2008 NABARD set up the Centre for Microfinance Research (CMR) within the Bankerss Institute of Rural Development, Lucknow to take up research activities in the field of microfinance for facilitating policy initiatives as well as fostering improvements in design and delivery of microfinance. The Centre has four sub-centres in Chennai,

Guwahati, Patna and Jaipur to focus on regional issues and houses the APRACA Centre of Excellence (ACE) in Linkage Banking which is envisaged to evolve as leading centre of knowledge in linkage banking. As of 31 March 2010, NABARD provided cumulative grant assistance of Rs. 194.18 lakh to the Centre. During 2008-10, the Centre undertook close to 56 studies, of which only two were classified as collaborative research. Coming to the cooperative credit sector, the National Council for Cooperative Training, New Delhi has set up one national level institute (VAMNICOM, Pune) and five Regional Institutes of Cooperative Management (Chandigarh, Bangalore, Kalyani, Gandhinagar and Patna) with the objective of organising need-based training programmes and conducting research in critical areas of cooperative movement. The National Institute of Rural Development is another state sponsored research agency with a special focus in rural finance issues. Since 2008 trainings, research and consulting activities relating to rural credit delivery and poverty alleviation have been coordinated by the Centre for Rural Credit and Development Banking (CRCDB) at the Institute.

Rural Finance Research Informal sector A few research/ capacity building institutions have come up in the past decade to cater to the special needs of the microfinance sector in India. The prominent among these are APMAS (Hyderabad), BASIX Livelihood School, Centre for Microfinance (Jaipur), Centre for Microfinance-IFMR (Chennai), and MicroSave India. Most of them engage in sponsored research and hence deal with more specific set of issues rather than topics that are of systemic relevance. Among these APMAS has emerged as the centre for excellence
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in the area of self help group-bank linkage model promoted by both NABARD and many state governments.

Some Challenges There is a clear lack of focus on research on rural finance. This is quite in line with the declining importance of the rural in the banking and financial sectors. There is no mechanism to consolidate the knowledge spread across different agencies that span public, private and third sectors. The capacity within the institutions to engage in new enquiries is limited by the availability of funds. It is interesting to note NABARD, an organisation with a paid up capital of Rs. 5000 crore has a research corpus worth Rs. 50 crore. The domestic research funds are concentrated within apex banking institutions, with in-house research teams. While the researchers are well qualified, emphasis on immediate policy relevance has limited the scope of research studies and effectively blocked the emergence of fresh perspectives and methodologies. These funds seem to flow more easily towards the management institutes rather than universities or social science research institutions. This again reflects the preoccupation of the system with problem solving kind of research to the complete neglect of more fundamental enquiries into the relationship between credit and social and economic change in the rural sector. An increased flow of international funds is observed in research into microfinance. But this has also resulted in the hegemony of certain methodologies as they get patronised by the government and also by the donor agencies.

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