Designing Financial Services for Rural Poor: Retooling Rural Financial Institutions?

Author(s): K. Kaladhar
Source: Economic and Political Weekly, Vol. 31, No. 39 (Sep. 28, 1996), pp. A117-A122
Published by: Economic and Political Weekly
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Designing Financial Services f o r R u ral P o o r
R eto o ling R u ral Financial Institu tio ns?
K Kaladhar
R equ irements o f f inancial services f o r po o r ru ral ho u seho lds enco mpass co nsu mptio n smo o thening, hu man capital
f o rmatio n, pro du ctio n and investment credit
ano 4nsu rance,
in additio n to savings f acilities. While the inf o rmal secto r
pro vides mo st o f the services, the f o rmal ru ral f inancial institu tio ns have inappro priate to o ls and perspectives in
delivering the services. Unless institu tio ns reto o l themselves by f o cu sing o n a ru ral ho u seho ld's eco no my rather than
limiting themselves to activity linked lending, they canno t be su ccessf u l in delivery o f f inancial services.
IN the recent past, thedebate o n ru ral f inancial
institu tio ns (R FI) has been f o cu sing o n
analysing reaso ns f o r 'su ccessf u l'
perf o rmance o f su ch institu tio ns mo re f ro m
o peratio nal perspectives and away f ro m
macro -eco no mic variables [Yaro n 1992]. In
the 1960s, 1970s and 1980s analysis centred
aro u nd pro blems stemming f ro m lo w interest
rates o r su bsidised credit, su pply leading
f inance, go vernment o wned and expanded
f inancial institu tio ns [Adams et al 1984].
Ho wever, no w, the emerging research o n
ru ral f inancial institu tio ns sho ws so me o f
the o peratio nal elements that have been
relevant to su ccessf u l perf o rmance su ch as
o rganisatio nal cu ltu re, remo ving
inf o rmatio nal asymmetry, etc. In this paper
it is pro po sed to examine the develo pments
that have taken place, synthesise the learning
and develo p an o peratio nal f ramewo rk f o r
implementatio n in the Indian co ntext with
respect to f o rmal ru ral f inancial institu tio n
system.
The ru ral po o r, especially wo men,
co mmo nly have restricted access to f inancial
services expected to be given by the f o rmal
ru ral f inancial institu tio ns. The Indian
perceptio n has been that du e to lack o f
adequ ate netwo rk o f su ch institu tio ns, the
inaccessibility has been f u rther strengthened.
As a remedial measu re the natio nal
go vernment assisted by do no rs have
envisaged, su bstantially in large-scale, f o rinal
regu lated pro grammes emphasising mo re
credit to po o r in ru ral areas. In the pro cess
hu ge bu reau cracy has been bu ilt-u p f o r the
pu rpo se o f pu rveying credit to ru ral po o r.
The f inancial pro grammes lau nched by the
f o rmal institu tio ns had o ther assu mptio ns
su ch as a lo w rate o f interest, pu rpo se linked
credit, f o rmal pro ject appraisal, etc, with a
view to reaching the benef its via inco me
generating activities, to the ru ral po o r.
P R OJECr AP P R OACH To LENDING
One o f the central pivo ts o n which the
credit institu tio ns were bu ilt was the Wo rld
Bank's appro ach to develo ping ru ral po o r,
viz, pro ject appro ach. The pro ject appro ach
was layered into def inite sequ ences with
identif icatio n o f the activity(ies) in the f irst
phase, f o llo wed by f o rmu latio n, appraisal,
implementatio n, mo nito ring and evalu atio n
phases.
This was called pro ject cycle [Bau m
1978]. P ro ject appro ach envisaged a detailed
pro ject appraisal invo lving calcu latio n o f
rates o f retu rn and f inancing the best o f the
pro jects
f o r the
pu rpo se
o f
generating
adequ ate inco me to the ru ral po o r. The f o cu s
u nder the appro ach was mo re o n the pu rpo se/
activity that was expected to 'help' the po o r
rather than o n the po o r themselves. In the
pro cess, du ring the 1960s and 1970s very
many ru ral develo pment pro jects in terms
o f secto rs su ch as plantatio n, ho rticu ltu re,
irrigatio n develo pment, animal hu sbandry
develo pment pro jects were appraised and
sanctio ned by the Wo rld Bank f o r
implementatio n thro u gh f o rmal ru ral
f inancial institu tio ns. In additio n, f u nctio nal
areas su ch as extensio n, credit, etc, also
received widespread impo rtance. Amo ng
these pro jects, primacy was acco rded to ru ral
credit pro jects u nder which the elements o f
pro ject appraisal were su bjected to analytical
rigo u r and rates o f retu rn were calcu lated
bo th u nder eco no mic analysis as well as
f inancial analysis. Credit was to be pu rveyed
u nder su ch pro jects to ru ral po o r f o r vario u s'
activities su ch as mino r irrigatio n, animal
hu sbandry, plantatio n and ho rticu ltu re, etc.
Each o f the activities was analysed in detail
in terms o f co sts and benef its and the rates
o f retu rn wce calcu lated acco rdingly. If the
rates o f retu rn'were abo ve the given cu t-o f f
po int, then the pro jects were accepted f o r
the pu rpo se o f f inancing u nder the pro ject.
Under the system, pro du ctio n-o riented
lending had taken ro o ts with elabo rate
sequ entially designed pro cedu res being
o bserved by ru ral bankers. So me bf the
characteristics that were develo ped and
stabilised o ver the years were activity/
pu rpo se
centred.
Technically
f easible sizes
were determined (e g, two milch animal u nit,
o ne hectare plantatio n o f o ranges) with the
o bjective o f achieving f inancial viability.
Farm bu dgets were designed alo ng with
f arm mo dels co ntaining extensive analysis
o n f inancial and eco no mic aspects.
R epayment wo u ld be f ixed in su itable
instalments o ver the eco no mic lif e o f activity,
af ter acco u nting f o r grace/gestatio n perio d,
o u t o f the inco me generated becau se o f the
activity. Thu s, ru ral f inancial institu tio ns
were to identif y activities keeping in view
the po tential o f the area, f o rmu late and
appraise f arm bu dgets and f arm mo dels (u nit
co sts), implement (advance lo ans) mo nito r
and then evalu ate. An activitywise area-
wise (villagewise) credit plan wo u ld be
prepared f o r the pu rpo se u nder the dispen-
satio n presently called 'Service Area Credit
P lan'. The Service Area Appro ach empha-
sised the pro ject appro ach at the micro -level
(branch level) with branch manager as the
f o cal po int f o r credit based develo pment o f
ru ral po o r residing in the service area co m-
prising o n an average abo u t 15-25 villages.
Co inciding with the pro ject appro ach to
lending, ano ther appro ach develo ped
f o cu sing o n the ro le o f f inance in eco no mic
develo pment, whereu nder the co ncept o f
f u ngibility o f mo ney was pro pagated which
theo rised that mo ney makes it dif f icu lt to
pinpo int exactly which bo rro wers had spent
f o r what. Fo r example, a bo rro wer who has
been f inanced f o r. pu rchase o f livesto ck,
perhaps co u ld have u sed, actu ally, the savings
which he/she has and u sed the lo ans taken
u nder the pro ject f o r the pu rpo se o f f inancing
a wedding o r any su ch so cial ceremo ny.
Ano ther u se f o r which lo an co u ld have been
pu t to may have been immediate debt
payment o r meeting co nsu mptio n needs.
This was expected to happen inspite o f po st-
lo an sanctio n and disbu rsement su pervisio n
with a view to ensu ring 'end-u se' o f lo ans.
The bo rro wer, acco rdingly, wo u ld perceive
the lo an f u nds as an additio nality to his to tal
bu dget and it wo u ld be dif f icu lt to attribu te
the benef its to investment in a pro du ctio n
activity as envisaged u nder the pro ject to the
lo an f u nds alo ne. In o ther wo rds, as lo ng
as a ru ral ho u seho ld's f inancial bu dget
permitted repayment, given its prio rities, the
repayment wo u ld o ccu r irrespective o f the
su ccess o f the investment lo an. In additio n,
it also pinpo ints the f u tility o f f o cu sing o n
inco me generatio n exclu sively o u t o f the
investment and repayment as a pro po rtio n
to the inco me generated. In o ther wo rds, by
co ncentrating and analysing the pu rpo se o r
the activity alo ne, the repayment need no t
o ccu r [P ischke and Adams 1980].
Eco no mic and P o litical Weekly September 28, 1996 A-I 17
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We will f irst examine the impact o f su ch
thinking at the macro -level, i e, at the level
o f Wo rld Bank which has been in the centre
stage in pro pagating the pro ject appro ach to
lending. The issu e o f cu rrent practices in
pro ject appraisal was examined and the
co nclu sio n that was arrived at was "we have
f o u nd that the extent to which (so cial co st
benef it analysis is) u sed and (has) real
inf lu ence is no t great, even in the Wo rld
Bank" [Little and Mirrlees 1991]. This
o bservatio n by Little and Mirrlees,
co nsidered the f athers o f the pro ject appraisal,
co mes as a sho cking statement and leads u s
to raise two bro ad qu estio ns [Shantayanan
et al 1995]. (1) What is the pro per ro le f o r
pro ject evalu atio n in to day's wo rld? (2) Ho w
can we make the pro ject appraisal ensu re
high qu ality pro jects?
When Little and Mirrlees wro te the Manu al
o f Indu strial P ro ject Analysis in 1969, the
go vernments were expanding pu blic
investments rapidly and mu ch o f that
investment was in indu stry and related
secto rs. Du ring tho se decades there were
majo r disto rtio ns arising f ro m trade po licy
and exchange rate po licy amo ngst the mo st
develo ping eco no mies and f o r the pu rpo se
o f remo ving this disto rtio n the f o cu s was o n
techniqu es su ch as bo rder prices and
co nversio n f acto rs. Ano ther f acto r that had
su stained pro ject appraisal in tho se decades
was the calcu latio n o f the rate o f retu rn f o r
a pu blic secto r pro ject. The same techniqu e
also was so u ght to be applied to ru ral
develo pment pro jects.
To day, in the latter 1990s, go vernments
o f the develo ping co u ntries are redu cing
their ro le, go ing ahead with privatisatio n o f
pu blic enterprises f o llo wed by gradu al
remo val o f disto rtio n in the trade po licy and
exchange rate systems. In additio n, the
co ncern no w is f o cu sed o n whether a pro ject
o u ght to be in the pu blic secto r at all o r no t.
This has led to the po sing o f a co u nterf actu al:
what wo u ld the wo rld lo o k like in the absence
o f a pro ject. In o ther wo rds wherever there
is a private secto r alternative to pu blic
pro visio n, enco u ragement sho u ld be
acco rded to the private secto r alternative.
The Wo rld Bank, thu s, o ver the years is
gradu ally shif ting f ro m activity specif ic
pro ject appraisal to that o f secto ral and pu blic
expenditu re analyses o r what is called
stru ctu ral adju stment lending. Fo r example,
the agricu ltu ral expenditu re review o f India
carried o u t by the Wo rld Bank in 1993
[P radhan and P illai-Essex 1993] examined
several agricu ltu ral pro grammes as pro jects
and calcu lated their minimu m rate o f retu rn.
It co nclu ded that two pro grammes
-
a
f ertiliser su bsidy and a cro p pro du ctio n
scheme - had a zero rate o f retu rn becau se
there was no ju stif icatio n f o r pu blic pro visio n
o f these go o ds. Yet the bu lk o f the Indian
go vernment' s expenditu re was go ing to these
two schemes. Interestingly, the stu dy also
po inted to the high rates o f retu rn in gro u nd
water irrigatio n and extensio n services
reco mmending a reo rientatio n o f pu blic
expenditu re in that directio n. This appro ach
actu ally go es beyo nd setting a go o d
f o u ndatio n f o r su bsequ ent appraisal. It also
impro ves the o verall qu ality o f the secto ral
investment pro grammes.
Co ncu rrent with the shif t o f f o cu s o f the
Wo rld Bank to stru ctu ral adju stment lending
f ro m pro ject-based lending, within the pro ject
cycle there have been qu alitative changes in
vario u s phases emerging with the expericnce
into 'new' pro ject cycle. The Bank's
evalu atio n su ggested that when develo pment
pro jects perf o rm po o rly it is u su ally f o r o ne
o r mo re o f the f o llo wing reaso ns: (i)
Benef iciaries do no t participate su f f iciently;
(ii) bo rro wers are no t co mmitted to pro ject
go als; (iii) risks are inadequ ately assessed
and managed; o r (iv) capacity bu ilding was
separately pu rsu ed thro u gh technical
assistance pro grammes, etc. The pro po sed
new pro ject cycle [P iccio tto and Weaving
1994] no w has (1) listening (2) pilo ting (3)
demo nstrating and (4) mainstreaming as
dif f erent phases.
Under the f irst phase, viz, listening, the
central ro le o f the bo rro wer and the
participatio n o f po tential benef iciaries, right
f ro m the start, symbo lises the learning
dimensio n o f pro jects as against
'identif icatio n' - a term su ggests a visu al
selectio n o f physical go als o r f o cu sing o n
specif ic activities su ch as mino r irrigatio n,
animal hu sbandry, etc. The seco nd phase,
pilo ting, is geared to explo ring alternatives
identif ied at the learning phase and
o bjectively assessing risks thro u gh
participato ry metho do lo gy. The third phase
is demo nstrating, i e, pro viding o ppo rtu nities
to f ine tu ne and adapt pro ject co ncepts to
ensu re a satisf acto ry develo pment impact.
The f o u rth phase, mainstreaming, aims at
achieving the o verall go al o f credit-based
assistance, viz, institu tio nal learning and en-
su ring a lasting impact o n the co u ntry's po li-
cies, practices, techno lo gies and skills. The
new cycle thu s co mes to f ru itio n with large-
scale ado ptio n, mainstreaming, o f metho ds,
techniqu es and pro grammes pio neered du ring
the pilo t and demo nstratio n phases.
Ano ther critical view o n the traditio nal
co st benef it analysis is seen f ro m its inability
in develo ping capabilities o f ru ral po o r and
bu ilding the same into co st benef it analysis
as presently practised [Clements 1995].
The existing literatu re o n eco no mic co st
benef it analysis seeks to exclu de the main
f acto rs that af f ect the ru ral po o r in terms o f
impro vements in nu tritio n, health, edu catio n,
etc. Under the appro ach titled 'capabilities
appro ach to pro ject analysis' (CAP A)
capability is lo o ked at no t o n the inco me o r
pu blic services, a perso n has access to , no r
o n the particu lar cho ice, plans and the
strategies a perso n makes bu t rather o n the
range o f cho ices that are available to the
individu al [Sen 1993]. Undernu tritio n and
po o r health restrict this range o f cho ices in
a direct, physio lo gical manner. Three kinds
o f inf o rmatio n sho u ld be co nsidered u nder
CAP A f o r indicating benef it levels. The f irst
is qu antitative inf o rmatio n co llected by and
f o r the pro ject, no rmally o n pro ject inpu ts
and o n changes in the benef iciary
po pu latio n's capability standards. Seco nd,
benef it estimates may be assisted by o u tside
stu dies bearing o n the co nnectio n between
pro ject inpu ts and po pu latio n capabilities.
Third, there sho u ld be so me sco pe f o r pro ject
staf f and agency representatives to co ntribu te
to benef it estimates based o n their
o bservatio ns and o pinio ns.
This su ggested appro ach, viz, CAP A has
several pro blems f o r o perating bankers at
the f ield level. They neither have time no r
skills f o r inco rpo rating these three elements
into assessing the credit demands and
thereaf ter taking a decisio n in the matter.
While co nceptu ally the appro ach is so u nd,
o peratio nally it is very dif f icu lt to implement
at the f ield level.
The abo ve debate leads u s to the co nclu sio n
that the Wo rld Bank, f ro m a co mmo dity/
secto r-based pro ject lending appro ach has
gradu ally shif ted to stru ctu ral adju stment
lending u nder which the macro -eco no my as
a who le is taken into acco u nt f o r assessing
the ef f ectiveness o f investment. The dif f erent
phases u nder the traditio nal pro ject cycle
have also given way to the new pro ject cycle
with shif ting o f f o cu s f ro m activity to the
ru ral po o ro rthe participant in adevelo pment
pro ject. This debate gives rise to the qu estio n
whether the shif ting o f f o cu s in po licy
perspective can be applied at the benef iciary
level o r at the level o f the ru ral po o r in terms
o f lo o king at the eco no my o f the benef iciary.
This means that instead o f f o cu sing o n the
f inancing o f the activity alo ne and deter-
mining the co st and benef its thereu nder, we
have to lo o k at a ru ral ho u seho ld's eco no my
at the f amily level and then determine what
kind o f credit packages need to be devised.
This calls f o r having a f resh lo o k at the way
the credit is seen f ro m the perspective o f
ru ral po o r and tailo ring f inancial services
delivery acco rdingly.
FINANCIAL SER VICES FR OM P ER SP EcnvE
OF R u R AL P OOR
In traditio nal appro ach to ru ral f inance,
the pro du ctio n side o f ru ral f arm ho u seho lds
is generally seen as pro viding the lo gic f o r
ru ral credit. What is f o rgo tten in the who le
pro cess is the po o r ho u seho ld's demand f o r
f inancial services relating to co nsu mptio n
smo o thening, hu man capital f o rmatio n, o f f -
f arm inco me generating activities, insu rance
and savings services [Zeller 1995; Zeller,
A-1 18 Eco no mic and P o litical
Weekly September 28, 1996
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Vo n Brau n, Jo hm and P u etz 1994]. In a
stu dy co ndu cted f o r the Wo rld Bank, the
natu re o f demand f o r f inancial services by
ru ral po o r in India was assessed thro u gh a
client su irvey [Mahajan and R amo la 1995].
It was f o u nd that in terms o f cu rrent u sage,
the prio rity acro ss dif f erent types o f f inancial
services amo ng the ru ral po o r was
co nsu mptio n credit, savings, pro du ctio n
credit and insu rance. Co nsu mptio n co nsti-
tu ted two -thirds o f the credit u sage, the rest
being f o r pro du ctio n credit. Co nsu mptio n
inclu ded illness, ho u seho ld expenses du ring
the lean seaso n. Inf o rmal secto r met co n-
su mptio n requ irements at a high rate o f
interest, with f o rmal ru ral f inancial
institu tio ns meeting two -thirds o f pro du ctio n
credit requ irements.
The u sage o f f inancial savings is lo w by
ru ral f inancial institu tio ns with ru ral po o r
themselves assessing a large gap between
their cu rrent savings and po tential savings.
In all, savings acco u nted f o r 5 per cent o f
the inco me and abo u t 10 per cent o f annu al
credit u sage. The u sage o f insu rance services
was very lo w.
Under pro du ctio n credit, many had
received lo ans linked to go vernment po verty
alleviatio n pro grammes su ch as IR DP af ter
acco u nting f o r o u t o f po cket co sts, payments
to middlemen, price dif f erence o f assets
received as lo an in kind vs the cash price
in the market, wage lo ss, etc.
In the delivery o f f inancial services, the
bo rro wers had o pined in ano ther stu dy, that
the attitu de o f the banking o f f icials was
indif f erent to them [R ajasekhar and Vyasu lu
1991 ]. That o btaining a lo an is a co mplicated
and lengthy pro cess was evident f ro m the
stu dy, in additio n to the f inding that the time
taken to get a lo an sanctio ned was inversely
related to the size o f land ho lding. Added
to that, the lo an amo u nts were inadequ ate.
It was also f elt, as a widespread pro blem,
that it was better to o btain a lo an f ro m a
mo neylender than to go thro u gh the o rdeal
o f bank pro cedu res [Gu pta and Shro f f 19Q0].
In the Indian co ntext, pro visio n o f credit
to the po o r and marginal f armers was
co nstrained by lack o f access in view o f
co llaterals, lo w interest rates, leading to
ratio ning o f credit to wealthy ru ral clientele,
f o llo wed by vario u s systems and pro cedu res
that were inappro priate f o r the ru ral po o r.
The credit needs o f the po o r as seen by them
[MYR ADA 1992] indicate that they requ ire
small bu t regu lar and u rgent lo ans f o r
co nsu mptio n whereas their o ptio ns were
restricted to IR DP o r similar pro grammes
designed and appro ved by the go vernment.
Small lo ans f o r co nsu mptio n were readily
available f ro m mo ney lenders who also
placed the po o r o n the track o f increasing
debt and bo ndage which went rapidly
do wnhill. On the o ther hand, banks were no t
willing to lend small amo u nts no r wo u ld
they entertain lo ans f o r co nsu mptio n, even
tho u gh it was o bvio u s that the largest nu mber
o f lo ans was taken f o r this pu rpo se. The
f o rmal ru ral f inancial institu tio ns also co u ld
no t give any lo ans qu ickly when needed.
Ano ther practice was ado ptio n o f
standardised co st and estimates o f ten o n the
gro u nds o f f easibility; these amo u nts were
generally larger than requ ired by the peo ple.
Fo r example, when f armers in o ne area,
where the water table was high, needed
appro ximately R s 3,000 to sink an o pen
well, the bank insisted o n pro viding the
standard rate o f R s 9,000. There are o ther
examples where the requ irements were higher
than the standardised co st o r what is kno wn
in the banking system as 'u nit co st'. There
was, thu s, no mechanism to f ine tu ne the size
o f pro jects and estimates to the micro
situ atio n. This is relevant to the co ntext o f
ru ral ho u seho ld's eco no my mentio ned
earlier. In several cases the schedu le o f
reco very design by the bank did no t co nf o rm
to actu al trends in retu rns. An interesting
case o f dif f erence in reco very schedu les
co ncerned milch animals. It is well kno wn
that in the su mmer the milk yield f alls, yet
the reco very instalments requ ired by the
bank remain co nstant, instead o f adju sting
to the actu al trends in milk yields. Ano ther
example o f inappro priate reco very schedu les
was the practice o f linking reco very with
harvest time o n agricu ltu ral lo ans to marginal
dry land f armers - the co re o f the ru ral po o r.
The majo rity o f them co nsu me o ver 80 per
cent o f their pro du ce and co u ld no t po ssibly
repay lo ans f ro m sales o f the remainder. The
schedu le o f reco veries co u ld no t be distu rbed
du e to changing situ atio ns as in o ne example
a member o f gro u p sto o d f o r village electio ns
who had bo rro wed f o r pu rchase o f a co w
f ro m the gro u p; the gro u p su spected that he
wo u ld sell the co w to raise f u nds f o r the
electio n so they seized it till the electio ns
were o ver. The ru ral f inancial institu tio ns
were pre-o ccu pied with viability. Fo r
example pro viding a po o r wo man with 10
ewes and o ne ram which u su ally f ailed to
earn adequ ate retu rns acco rding to schedu les
since it pre-su ppo sed that the wo man was
do ing no thing prio rto this pro ject. Managing
a 10+1 u nit is almo st a f u ll timejo b requ iring
her o f giving u p o ther wage o ppo rtu nities
which pro vided her daily needs in o rder to
manage the sheep u nit. Thu s, the ru ral
f inancial institu tio ns igno red manageability
in the pro cess o f determining viability. The
abo ve illu stratio ns indicate the inappro -
priateness o f the strategy and systems and
pro cedu res f o llo wed by the f o rmal ru ral
f inancial institu tio ns.
AP P R o AcH ro DELIVER Y OF FINANCIAL
SER VICES BY INFOR MAL SECrOR
Given the paradigm o f ru ral po o r
perceptio ns and the inadequ acy o f f o rmal
ru ral f inancial systems inmeetingthedemand
with all its stru ctu ral requ irements, ho w the
inf o rmal secto r, inclu ding the self -help
gro u ps, is catering to the ru ral po o r is dealt
with belo w. The evidence with regard to the
appro ach o r 'ho w' the f inancial services are
delivered is linked directly to the
metho do lo gy o f credit ratio ning emplo yed
by the inf o rmal secto r.
The determinants o f credit ratio ning centre
aro u nd inf o rmatio nal asymmetry between
lender and bo rro wer [Stiglitz and Weiss
198 1 ] leading to lenders demanding co llateral
o rcharging higherrates o f interest. Co llateral
requ irements have been identif ied as a majo r
determinant o f the lenders' decisio n to ratio n
lo an demand [Binswanger et al 1989].
Inf o rmal lenders o n the o ther hand, o f ten u se
co llateral su bstitu te. Third party gu arantees,
trade co ntracts and threat o f lo ss o f f u tu re
access to credit are co mmo n devices in
inf o rmal co ntacts [Adams and Fitchett 1992,
Binswangeret al 1989]. In a stu dy co ndu cted
in Madagascar o n determinants o f credit
ratio ning by bo th inf o rmal lenders and f o rmal
credit gro u ps [Zeller 1995] several f indings
are o f relevance to the Indian co ntext. The
credit ratio ning by inf o rmal lenders was
determined by age with o lder individu als
mo re likely to apply f o r credit, with higher
age leading to decline in credit o btentio n.
Seco ndly, the nu mber o f years o f scho o ling
has a po sitive ef f ect o n lo an applicatio n
since it au gments, o ther things being equ al,
retu rns o n capital and theref o re credit
demand. Thirdly, the po o r, pro xied by
o ccu rrence f o r wage inco me, signif icantly
rely o n inf o rmal credit f o r co nsu mptio n
smo o thening with a du ratio n o f two mo nths
which is easily o btained with little waiting
time. Fo u rthly, it is the head o f the ho u seho ld
who is mo re likely amo ng the members to
ask f o r a lo an. The f if th determinant relates
to sickness leading to the demand f o r credit
f o r f inancing medical care. In co ntrast to
these determinants which trigger seeking
credit f ro m inf o rmal lenders, the decisio n
taken by the f o rmal gro u ps is to appro ve a
lo an requ est based o n the health o f the
applicant ho u seho ld (which is an indicato r
o f repayment ability) in additio n to existing
indebtedness in the inf o rmal secto r while the
o u tstanding debt taken f ro m the f o rmal secto r
do es no t impinge o n the ratio ning pro cess.
The pilo t pro ject o n develo ping linkages
with self -help gro u ps cu rrently u nder
implementatio n in India also gives u sef u l
insights into the ratio ning pro cess o r the
metho do lo gy o f appraisal being f o llo wed by
the self -help gro u ps [NABAR D 19951. The
gro u ps' initial so u rce o f f u nd was savings
su pplemented laterby creditand the activities
f inanced were need based even while self -
help gro u ps ado pted a f lexible appro ach.
Interest rates charged were varying and
market-related; sho rter repayments were
Eco no mic and P o litical Weekly September 28, 1996 A-I 19
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f ixed, as against the pro cedu ral requ irement
o f allo wing lo nger repayment perio d by
f o rmal ru ral f inancial institu tio ns, keeping
in view all available so u rces o f inco me instead
o f limiting to inco me generated o u t o f the
f inanced activity alo ne. This f acilitated
members taking mo re than o ne lo an du ring
a year. Flexibility in no rms o f lending was
o bserved o n case to case basis with less
impo rtance attached to do cu mentatio n. In
case o f emergency/situ atio ns o f distress, a
seco nd lo an was also allo wed while the f irst
lo an was yet to be repaid. P enal interest f o r
delays in repayment o f instalment was applied
f lexibly. Meetings o f gro u ps were co ndu cted
regu larly which served as a f o rmal base f o r
exchanging inf o rmatio n, co mpleting
do cu mentatio n, etc.
In the co ntext o f the abo ve it is u sef u l to
lo o k into the to tally new dimensio ns thro wn
u p in respect o f Bangladesh Grameen Bank,
a f o rmal ru ral f inancial institu tio n, in
managing credit f o r the ru ral po o r and the
reaso ns f o r its su ccess [Jain 1996]. The
stu dy, startlingly, indicates that the Grameen
Bank in practice do es no t enf o rce its
acclaimed po licy o f making f ive-member
gro u ps jo intly respo nsible f o r repayment o f
lo ans. Co ntrarily, the su ccess o f the Grameen
Bank was po sited to a co mbinatio n o f several
o rganisatio nal po licies which were designed
to steer the behavio u r o f its large nu mber
o f f u nctio naries and bo rro wers alo ng a "credit
respo nsive mo de". The elements o f credit
respo nsive mo de centred aro u nd vario u s
o rganisatio nal levels and at each level
dif f erent 'credit respo nsive paths' have been
taken ensu ring in an o verall co ntext, the
su ccess o f the bank. At the lo cal village level
the banks credit po licies pro vided a set o f
neo classical (dis)incentives to align the self -
seeking behavio u r o f bo rro wers alo ng a credit
respo nsive path. The impo rtant activity o f
gro u p/centre was meant to develo p a cu ltu re
wherein bo th members and the bank
f u nctio naries f o llo wed the bank no rms
implicitly and as a matter o f ro u tine. The
main pu rpo se and f u nctio n o f the gro u ps
andcentres was to f o ster this cu ltu re by
enabling ro u tine repetitio n o f ideo lo gical
behavio u r by all the members week af ter
week, 52 times a year which made it a
'cu ltu ral habit' f o r each individu al to f o llo w
bank no rms.
In respect o f branch o peratio ns as well as
at the level o f area o f f ice the characteristics
that were o bserved related to ro u tineness,
reliability in service delivery, demo nstrable
ho nesty and erro r-f ree perf o rmance in
additio n to repeated su pervisio n and cro ss-
checks. In su mmary, in develo pment banking
no t o nly do the determinants o f bo rro wer
members' behavio u r have to be in place, bu t
the determinants/stimu lants o f bank
f u nctio naries perf o rmance also have to be
pro perly aligned. The Grameen Bank thro u gh
its staf f incentive po licies co u ld bro adly
align its staf f s' self -seeking behavio u r with
the bank's no rms.
SUCCESSFUL R FIS FR OM INDONESIA
The relative su ccess in the pro visio n o f
f inancial services to the ru ral po o r, indicated
by Indo nesian experience (Chaves and
Go nzalves-Vega 1996], is also no tewo rthy
f o rthe Indian co ntext. The vario u s Indo nesian
R FIs have f o stered intensive inter-actio n o f
two types o f agents, viz, tho se who have the
inf o rmatio n and tho se who have the
reso u rces, in the pro visio n o f f inancial
services to the ru ral po o r. Su ch inter-actio n
has been at the f o u ndatio n o f the su ccess o f
the Indo nesian ru ral f inancial institu tio ns.
The individu alised appro ach instead o f the
gro u p appro ach in the co ntext o f Indo nesia
pro ves that jo int liability o r peer pressu re
wo u ld resu ltinextraco sts, and mo ral hazards
f o r the gro u p members, leading to bo rro wing
o n individu al basis. This was also pro ved
in the case o f Grameen Bank example cited
abo ve.
All the steps necessary to co mplete the
f inancial transactio n are u ndertaken lo cally.
In mo st cases the client do es no t have to
leave his/her village. Fu rther, lo cal decisio n-
making and character-based lending (when
no co llateral is requ ired) allo w f o r the rapid
disbu rsement o f lo ans. Mo st o f the time
f u nds are available when needed, with no
particu lar restrictio ns o n end u se. Mo st
impo rtantly, lo ans are granted o n individu al
basis.
To o verco me inf o rmatio n asymmetry
which is the heart o f the ru ral f inancial
market pro blem, the Indo nesian experiment
reso lved thro u gh a system o f incentives
(perf o rmance-based remu neratio n and
ef f iciency wages as co mpatible incentives)
that has indu ced a behavio u r o n the part o f
R FI managers co nsistent with the f inancial
health o f the u nit.
The ro le o f credit and credit institu tio ns
in au gmenting pro du ctio n and pro du ctivity
is well reco gnised. This appro ach has resu lted
in an impressive gro wth o f ru ral banking in
India o ver the last f o u r and a half decades
in terms o f o u treach, credit disbu rsement
and su ppo rt to the po verty alleviatio n
pro grammes. Ho wever, the emphasis
thro u gho u t has been o n achieving certain
qu antitative targets leading to lo an def au lts
and virtu al ero sio n o f repayment ethics. The
end resu lt was the distu rbing gro wth in
o verdu es which no t o nly hampered the
recycling o f scarce reso u rces o f banks bu t
also af f ected the pro f itability and viability
o f the f inancial institu tio ns.
Ou t o f the 369 district central co -o perative
banks, o nly 171 were o perating in pro f it as
o n March 31, 1994. The o verdu es atR s 3,874
cro re co nstitu ted 33 per cent o f the demand.
As regards primary agricu ltu ral credit
so cieties (P ACS), o u t o f 90,783 u nits, o nly
52,211 (58 per cent) had been identif ied as
being viableas o n March 31, 1994. Overdu es
o f P ACS at R s 3,875 cro re co nstitu ted 38
per cent o f their o u tstanding lo ans. The
pictu re as regards the regio nal ru ral banks
(R R Bs) was no better. Du ring 1994-95, 32
R R Bs had made pro f it while 164 R R Bs
sho wed a lo ss aggregating R s 423.21 cro re.
The annu al lo ss increased f ro m R s 94.05
cro re in 1991 to R s 425.65 cro re in 1994-
95 while the accu mu lated lo sses o f R R Bs
aggregated R s 1,686.61 cro re as o n March
31, 1995 (C R angarajan First R avi Mathai
Memo rial Lectu re 1996). Similar data f o r
ru ral bu siness o f co mmercial banks is no t
available.
The characteristics in terms o f internal
practices and attitu des amo ng ru ral f inancial
institu tio ns indicate that they are no t su ited,
stru ctu rally, f o r the delivery o f the f inancial
New Bo o k Fro m
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services to the ru ral po o r [Mahajan et al
1995]. Few pro du cts su it ru ral peo ple's
special needs o n the dimensio n o f u rgency,
inf o rmality, seaso nality, illiteracy and
diversity in liveliho o d. No co nsu mptio n lo ans
are given while lending is secu rity-based
with the insistence o n co llaterals. Largely,
o ne time lo ans are given with the po o r seen
as a so cial o bligatio n and intrinsically
u nwo rthy o f credit.
The f inancial secto r ref o rm that is cu rrently
u nderway enco mpasses the institu tio nal ru ral
credit delivery system. As part o f the
measu res recapitalisatio n is being u ndertaken
alo ngwith o ther measu res su ch as
develo pment actio n plans, co u pled with
memo randa o f u nderstanding f o r the pu rpo se
o f chalking o u t actio n-o riented strategies f o r'
revitalising the institu tio ns.
Ho wever, little attentio n has been paid to
the rigid f ramewo rks that have permeated
the ru ral f inancial institu tio ns. This is
evidenced f ro m the perspectives o f ru ral
po o r with regard to credit. One po int, a
central o ne at that, o f impo rtance in the
ref o rms pro cess in respect o f ru ral f inancial
institu tio ns is that u nless the ru ral po o r are
respo nded to pro perly the ru ral f inancial
institu tio ns will no t be able to trigger requ ired
impu lses and maintain themselves as vibrant
and healthy institu tio ns. Time has co me to
reco gnise limits o f credit as against credit
limits [Dandekar 1995]. Based o n the
experiences o u tlined abo ve what is requ ired
is reto o ling o f the ru ral f inancial institu tio ns
rather than tinkering at the periphery in the
name o f ref o rms.
In additio n to the abo ve the Indian ru ral
credit system is characterised by certain rigid
f ramewo rks which are inhibiting perf o r-
mance co mpared to that o f inf o rmal secto r.
The elements that characterise the f ramewo rk
and simu ltaneo u sly inhibit the perf o rmance
are: u nit co sts, repayment perio ds, grace
perio d and/mo rato riu m perio d, lo o king at
the activity, and co nf ining o ne-self to the
inco me generatio n and u nit co st f ro m the
po int o f view o f activity alo ne.
If o ne has to learn the lesso ns f ro m the
practices being f o llo wed in the credit
management gro u ps o r inf o rmal lenders what
kind o f pro cedu ral changes can be made so
as to bring in the elements o f Grameen Bank
as already discu ssed co u pled with the
ef f ectiveness o f the inf o rmal secto r? It
appears that the present activity-based
f inancial relatio nships need to be given a go -
by so as to o verco me the stru ctu ral rigidities
in appro ach to ru ral f inance. In the inf o rmal
secto r the lenders always lo o k to the
individu al and take a ho listic view o f the
cash f lo ws that are being generated by the
invidu al. In this co ntext, it is u sef u l to recall
what was already discu ssed here with regard
to changes in the learning pattern o f the
Wo rld Bank f ro m that o f specif ic pro ject
activity to that o f stru ctu ral adju stments
lending. It is also u sef u l to recall the present
rethinking that is o ccu rring in respect o f the
pro ject cycle appro ach f ro m the traditio nal
phases o f identif icatio n, f o rmu latio n,
appraisal implementatio n, mo nito ring. and
evalu atio n, to give impo rtance to the
'pro cess' by f o cu sing o n (a) listening, (b)
pilo ting, (c) demo nstrating and (d)
mainstreaming.
Under this pro cess the co re f o cu s is o n
develo ping and endu ring relatio nship
between the lender and the bo rro wer o n a
lo ng-term basis rather than seeking it as a
o ne sho t lending appro ach. In the light o f
the abo ve the ru ral bankers sho u ld no w
realign appro ach to ru ral f inancing
whereu nder the ru ral f amily o r the ru ral
ho u seho ld is taken as a u nit f o r the pu rpo se
o f ho listic analysis o f its micro -eco no my.
A ru ral ho u seho ld o r a ru ral individu al
will be the f o cu s f o r delivering f inancial
services. Financial services wo u ld enco mpass
dif f erent requ irements as seen f ro m the
ho u seho ld perspective in terms o f investment
credit, pro du ctio n credit, co nsu mptio n
smo o thenilig, hu man capital f o rmatio n,
insu rance and last bu t no t the least appro priate
savings pro du cts.
The inf o rmatio nal asymmetry between the
f inancial institu tio n and the ru ral ho u seho ld
can be o verco me by develo ping lo ng-term
and endu ring relatio nships. Fo r the pu rpo se
the present metho do lo gy o f do ing banking
f ro m the branch premises need to be
reo riented. The branch manager assisted by
his staf f shall have to visit each o f the villages
u nder his service area regu larly and deliver
f inancial services at the village itself . The
visits may be su ch that each o f the villages
are visited at least o nce in 10 days du ring
which time he mu st mo bilise bo th savings
as well as disbu rse credit.
In the initial stages, say f irst six mo nths
o r o ne year the branch manager shall identif y
abo u t 100-200 f amilies in a village and
develo p do cu mentatio n o n each o f the
f amilies with regard to the f amily eco no mics,
the assets and liabilities po sitio n inclu ding
debts o wed to inf o rmal secto r. This is to be
do ne simu ltaneo u sly alo ng with mo bilising
savings f ro m the ru ral ho u seho lds.
Af ter the bo nd is established between the
branch manager and the f amily, credit
requ irements o n an o verall basis can be
ascertained and revo lving credit f acilities
can be granted keeping in view the qu antu m
o f requ irements. While granting revo lving
credit f acilities the distinctio n between
pro du ctio n credit and investment credit shall
be dispensed with. The activities that the
bo rro wer pro po ses to take u p shall be assessed
by the bo rro wer o r the ru ral ho u seho ld itself
and amo u nts o f lo ans arrived at taking into
acco u nt co nsu mptio n smo o thening, hu man
capital f o rmatio n, etc. No u nit co st f o r
investment credit o r scale o f f inance in respect
o f pro du ctio n credit shall be applicable. The
repayment schedu le shall be drawn u p with
weekly instalments and each o f the
instalments shall be co llected du ring the
visits by the branch manager to the village.
The f amily credit plan u nder
implementatio n u nder IR DP needs to be
distingu ished f ro m the appro ach su ggested
abo ve. The emphasis u nder the f amily credit
plan co ntinu es to be 'lending' f o r two o r
mo re activities expectedly bringing the
f amily abo ve po verty line witho u t lo o king
into the co mpu lsio ns o f a ru ral ho u seho ld's
eco no my. The appro ach in o ther wo rds wo u ld
be in co nso nance with the clientele
requ irements with the ru ral ho u seho lds being
the central f o cu s.
With a view to o peratio nalising the ru ral
ho u seho ld appro ach to f inancial services a
beginning can be made by selecting 4-5
districts in India invo lving the ru ral and
semi-u rban branches o f co mmercial banks,
the branches o f R R Bs as well as the gro u nd
level u nits o f the co -o perative banking
system. Fo r the last 50 years we have been
in the f irst phase o f the new pro ject cycle,
viz, listening. Having do ne that, it is rather
o verdu e f o r getting into the seco nd phase
o f the new pro ject cycle, viz, pilo ting. It
wo u ld be appro priate that at the earliest,
actio n is initiated by the go vernment and
o ther co nnected acto rs and pilo t stage is
lau nched witho u t any f u rther delay..
TOWAR DS A CONCLUSION
In the co ntext o f the pro blems being f aced
by the ru ral f inancial institu tio ns, bo th
endo geno u s and exo geno u s, and with a view
to impro ving the delivery o f f inancial services
to the ru ral po o r, several measu res are being
taken f o r impro ving the system. In additio n
to f inancial secto r ref o rms at the o peratio nal
level linkages with inf o rmal secto r in the
f o rm o f self -help gro u ps has been established.
The develo ping o f linkages with self -help
gro u ps which started o n a pilo t basis
so metime ago has no w been extended all
o ver India [R BI 96] in terms o f the
reco mmendatio ns o f the wo rking gro u p set
u p to examine the issu es o n the su bject. The
mandate to extend the linkage pro ject has
ho wever, been seen f ro m the po int o f view
o f inclu ding the lendings to self -help gro u ps
u nder 'prio rity secto r' and bu ilding u p a
database o n the lendings thro u gh a f o rmat.
Unf o rtu nately, o ne o f the indicato rs that is
missing in the f o rmat relates to data regarding
savings mo bilisatio n which is the basis f o r
linking with self -help gro u ps. Several
pro po sals have been made elsewhere f o r
expanding the linking pro cess in terms o f
impro ving the reso u rce base o f self -help
gro u ps, o peratio nal 'takeo vers' and making
the self -help gro u ps agents o f f o rmal banking
Eco no mic and P o litical Weekly September 28, 1996 A-121
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system [Kaladhar 1995]. Co termino u s with
su ch ef f o rts there is a need f o r change f ro m
within in respect o f ru ral f inancial institu -
tio ns and the changes if no t in terms o f
attitu des, have to co me by taking the ru ral
ho u seho ld as the central po int f o r delivery
o f f inancial services. By mo ving away f ro m
activity-based lending appro ach to ru ral
ho u seho ld-based co ntinu o u s f inancial
relatio nship f o u ndatio n the strengthening o f
ru ral f inancial institu tio ns is expected to
happen o n a mo re qu alitative f o o ting.
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No P L BC 120/04.09.22/95-96 dated
April 2, 1996 - Linking o f Self -Help Gro u ps
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f o llo w-u p.
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CENTR E FOR STUDIES IN SOCIAL SCIENCES,
CALCUTTA
CULTUR AL STUDIES WOR KSHOP
The Centre f o r Stu dies in So cial Sciences, Calcu tta, will ho ld its
annu al All India Cu ltu ral Stu dies Wo rksho p o n 1-5 Febru ary 1997
in Gwalio r. The theme f o r this year's wo rksho p is "Cu ltu re and
Demo cracy" in which the f o cu s will be o n co ntestatio ns o ver identity,
au to no my and equ ality in the f ields o f cu ltu ral pro du ctio n in India.
The wo rksho p is intended to give yo u ng researchers the o ppo rtu nity
o f intensive discu ssio n o f their wo rk with senio r scho lars. The f acu lty
will inclu de distingu ished scho lars f ro m India and abro ad. The CSSSC
will bear the expenses o f travel within India f o r all participants and
will extend f u ll ho spitality to them in Gwalio r.
P o st-do cto ral scho lars o r tho se in advanced stages o f do cto ral wo rk
and pref erably u nder the age o f 35 who wish to jo in the wo rksho p
may apply with c.v. and a descriptio n o f their cu rrent research.
Applicatio ns are to be sent by No vember 30, 1996 to the R egistrar,
Centre f o r Stu dies in So cial Sciences, Calcu tta, 10 Lake Terrace,
Calcu tta 700029.
A- 122 Eco no mic and P o litical Weekly September 28, 1996
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