financial services for the rural poor and women in india: access and sustainability

Journal of International Development: VoL. 8, No. 2,211-224 (1996)

FINANCIAL SERVICES FOR THE RURAL POOR AND WOMEN IN INDIA:

ACCESS AND SUSTAINABILITY'

VIJAY MAHAJAN BASIX,

BHARTI GUPTA RAMOLA Price Waterhouse

Abstract: This paper, based on a study commissioned by the World Bank, reviews the performance of Indian financial institutions in providing services to the rural poor and examines the key issues facing policy makers and institutions as the country moves forward on financial sector reforms. The study posits two sets of causal variables for institutional performance: (i) Internal Practices Attitudes (IPAs); and (ii) mechanisms for client interface that either enhance or thwart access by the rural poor and women (MEAs). Both of these variables are largely within the control of the financial institutions. The study sought to identify changes in these variables that could improve access to financial services by the rural poor. The authors conclude, however that rural financial institutions are faced with a hierarchy of constraints, largely beyond their control, and any attempt at developing workable and sustainable approaches to improved access of the rural poor to financial services will need to address a whole range of macro-policy issues including depoliticization, ownership and governance in addition to regulatory issues.

BACKGROUND

Indian policy makers have had a long standing concern for enhancing the access to institutional credit by the rural people, particularly the rural poor. The first impe- tus for state intervention in rural financial markets was provided by the findings of the All India Rural Credit Survey (Gorwala Committee) which showed that institutional credit accounted for only seven per cent of the borrowings of rural households in 1951-52. For the bottom 30 per cent of households it was as low as four per cent. In response, since the fifties, the Government has taken a variety of ini-

'The study was managed by the Gender and Poverty (GAP) Team of the Asia Technical Department's Human Resources and Social Development Division (ASTHR) on behalf of the India Department's Agricultural Division (SA2AG). Funding for the study was provided by the Japanese and Norwegian governments.

0 1996 by John Wiley & Sons, Ltd. 0954-1748/96/020211-14

212 V. Mahajan and B. G. Ramola

tiatives aimed at improving flow of credit to rural areas. These have included nationalization of commercial banks, establishment of a machinery for subsidised finance for targeted lending, expansion of the three-tier agricultural credit co- operative system, establishment of a new channel (regional rural banks), a focus on branch expansion, and involvement of financial institutions in planning and implementation of priority sector lending and poverty alleviation programmes.

By certain traditional measures, this strategy has worked well. By March 1993, there were 35,360 rural bank branches, of which as many as 34,370 were opened after 1969. Today, rural bank branches account for 56 per cent of the branch network of commercial banks, each rural branch serving an average of 3,200 households. The co-operative structure with over 100,OOO primary agricultural cooperatives provides more intensive penetration. As of 31 March 1993, rural deposits accounted for 15 per cent of the total deposits (23 per cent of incremental deposits after 1969). Commercial bank outstanding credit to rural areas was approximately Rs 230 billion, or around 14 per cent of the total credit (with the co-operative system having an additional credit outstanding of around Rs 80 billion). The overall credit-deposit (C-D) ratio for rural areas was 77.0 per cent as against the national C-D ratio of 57.7 per cent.’ Thus, it could be said that the rural financial institutions (RFIs) comprising nationalized commercial banks (NCBs), Regional Rural Banks (RRBs) and co-operative banks together have made great efforts to provide both credit and deposit services to rural India.

THE RURAL FINANCE ICEBERG

Yet credit usage studies show that while there has been improvement in credit provided by the formal sector in rural areas, the formal sector only accounts for the tip of the iceberg of rural finance (see Figure 1). A large part of rural financial flows are transacted in the informal sector; and an even larger part appears to be unreported - and poorly understood.

Against this background, in 1991, the Government of India, driven by a balance of payment crisis, launched a liberalization programme with financial sector reforms as a major part of the effort. The main focus of financial sector reforms has been to restore profitability of banks and ensure adoption of prudential norms. However, there has been growing concern that in their quest for improving financial performance, banks in India may neglect, or indeed reduce their services to certain segments of the population, such as the rural poor, and particularly poor rural women.

THE STUDY

With this concern in mind, the World Bank commissioned a study in mid-1993. The study, carried out from the perspective of a rural financial institution (RFI), sought to assess the potential market for financial services provided to the rural poor, identify constraints to realizing the potential and develop workable

This number is close to the theoretical maximum as India continues to have large statutorylcash reserve requirements.

Financial Services for the Rural Poor and Women in India 213

Figure 1. The rural finance iceberg: the invisible informal sector. The picture is based on the amount outstanding. Source: All India Debt and Investment Survey, AIDIS (198142), Statistical Tables (RBI, 1989).

approaches to reducing the constraints and extending services to the rural poor in a financially sustainable manner. The study was carried out by Price Waterhouse, in conjunction with an independent development professional with experience in poverty alleviation and rural credit programmes of the government and NGOs. The study covered a range of financial services (credit, savings, insurance) and a host of financial service providers (banks, co-operatives, insurance companies, private financiers, moneylenders, self-help groups, NGOs, etc.).

The study components included:

a survey to determine the pattern of demand and supply of financial services for the rural poor and women;

0 an in-depth study of financial service providers, particularly of a large public sector bank, with a view to assess the depositor and borrower profile, loan portfolio, recoveries and loan losses, costs and profitability;

0 a study of institutional practices and attitudes (IPAs) of bank officials who deal with the rural poor and women as clients;

0 a survey of ‘best’ practices adopted by the mainstream financial institutions and alternative FIs (such as NGO self-help groups), with a view to cost them and assess their effectiveness and possibility of wider use, to reach the poor; and

0 development of a set of financial scenarios with various assumptions about policy and operating level changes.

The study took about eighteen months to complete and involved coverage of 60 villages in which about 600 rural poor individuals (300 men and 300 women) and 110 rural branch officers were canvassed using structured questionnaires. An in- depth analysis was carried out of over 600 loan records and 750 deposits. This was supplemented by a review of available published material and analysis of finan- cials of NCBs and a number of RRBs and cooperative institutions.

This paper presents some of the premises and findings of this study which are likely to be of general interest.


CONCEPTUAL FRAMEWORK

The study posited a conceptual framework (see Figure 2) which described a financial institution (FI) serving the rural poor and women, as effective if it scored high on the twin criteria of access and sustainability. The framework sought to explain the varia- tion across FIs in access and sustainability through causal variables described as ‘Institutional Practices and Attitudes’ (IPAs), internal to the FI, and ‘Mechanisms that Enhancemhwart Access’ (MEAs), used by the FI to interface with its clients.

The study found that the formal sector RFIs in India, which were in quadrant ‘4’ (Low access, high sustainability) before social banking initiatives by the government, have moved 90” to 180” and now lie largely in quadrants ‘3’ (low access and low sustainability) and to some extent in quadrant ‘2’ (low sustainability, high access). Non- government efforts similarly were found to lie primarily in quadrant ‘2’, though some instances of movements in the direction of sustainability were noted. On the other hand, the usage of credit by the rural poor is high, but provided mainly from informal sources (see Box 1 for details). Thus, the situation is far from satisfactory seen either from the point of view of rural customers or the RFIs. The study findings in regard to the problems of the customers and RFIs are enumerated below.

The effect or policy lnttlatlvea8l~ 1969

Figure 2. Policy impact on institutional performance.

PROBLEMS OF CUSTOMERS

Credit from RFIs is not easily available, despite the network expansion. A large proportion of the borrowers surveyed had received loans linked to government poverty alleviation programmes, such as the Integrated Rural Development Programme (IRDP) in which the Government gives an upfront capital subsidy to the borrower. However, these loans have been given only once (sometimes twice) since these programmes were initiated in the seventies. The only exception to this is crop loans provided by Primary Agricultural Cooperatives (PACs) in the better run States.


Box 1.0 Production credit and Consumption credit: a mismatch of demand and supply. Source: Price Waterhouse survey data.

In terms of current usage, the priority across different types of financial services among the rural poor is as follows: consumption credit, savings, production credit, and insurance. Consumption constitutes two-thirds of the credit usage. Within consumption credit, three-quarters of the demand is for short-term purposes such as illness and household expenses during the lean season.

The demand for consumption credit is met entirely through the informal sources, since at present the formal sector does not lend for this purpose. The informal sector, in meeting the demand for consumption credit, is able to extract a higher price for the service, in terms of interest rates (varying from 32 to 92 per cent). Production credit accounts for one-third of the total credit usage by the rural poor and women. nearly three-quarters of the demand for production credit is met by the formal sector, mainly banks, but also cooperatives, at relatively low interest rates (around 12 per cent nominal, or 2 per cent real).

The overall sourcehe pattern for annual credit usage based on an average of credit consumption in the last three years was as follows:

Source Use Productive Consumption Total

Formal 16 0 16 Informal 21 63 84 Total 37 63 100

Note: Figures are percentages of total credit usage.

0 Transaction costs of borrowing are high. The study shows these to be in the range of 17 to 22 per cent of the loan amount for commercial bank loans. In computing this transaction cost, besides out-of-pocket costs, payments to middlemen, and the price difference of assets received as loan in kind versus their cash price in the market were all taken into account. If, in addition, the wage loss due to time spent in getting the loan is accounted for, the transaction costs are even higher. The effective interest rate works out to 26 to 38 per cent, depending on the loan period, if transaction costs are taken into account. Thus, the transaction cost adjusted interest rate comes close to the lower range of the informal sector interest rate. However, since transaction costs have partly ballooned because of the subsidy linked with the loans, the effective interest rate needs to take subsidy into account. With 33 per cent subsidy, the effective interest rate varies from 3.6 to 6.5 per cent. With 50 per cent subsidy, the interest rate in fact becomes negative.

0 Transaction costs for using savings facilities are also high, if wage loss for the time taken to go to the bank is taken into account. Based on the survey, this cost is estimated at about 15 per cent of the average monthly savings assum- ing that the savings account is operated once a month.

0 There are persistent complaints regarding inadequacy of the loan amount, rigidity of terms and the lack of timeliness of formal credit. These factors, along with high transaction costs, negate the effects of low interest rates. Only 30 per cent of the borrowers of commercial banks rated their overall


experience with their bank as good or above (on a five point scale from very bad to very good). For households below the poverty line, consumption credit needs are in the range of two-thirds of the total credit needs. Yet no consumption credit is available from banks for lower income groups (although credit cards and con- sumer loans are now available to higher income borrowers). From the data, it was inferred that between half and two-thirds of the credit from banks for productive purposes gets diverted to other purposes (See Box 2 for details). The survey indicated the main reasons for diversion were to meet lean season household expenses and contingencies such as illness in the family, social obligations (marriages, feasts), and repayment of moneylender loans. The extent of credit to specially disadvantaged groups such as the landless, artisans and women is very limited. For example, only 2.7 per cent of the rural credit in 1992 went to artisans and village industries. While similar statistics are not available for women, the study of a sample of branches of the commercial bank showed that only 10 per cent of the borrowers were women (accounting for 9 per cent of loan amounts advanced). The landless and women also have a major access disadvantage since they are unable to offer land as a collateral.

Box 2.0 Utilization and repayment behaviour of rural borrowers.

Of the 600 respondents canvassed, only 12 per cent of those with outstanding bank loans were regular in their repayment. Wide-spread credit diversion, low levels of awareness of repayment condition etc. were observed.

The key findings of the study were as below: of those who had taken a loan for asset procurement, 52 per cent did not have the asset any longer; of which 0 16 per cent did not purchase the asset 0 57 per cent bought it, but sold it off subsequently 0 27 per cent responded that the asset died (in the case of a cattle loan) or

Of those who had taken a loan, 0 92 per cent did not know the interest rate 0 28 per cent did not know the repayment amount 0 29 per cent did not know the balance outstanding. These statistics were not very different for women. However, misuse and low

levels of awareness were more pronounced for IRDP loans.

stopped functioning.

THE PROBLEMS OF RFIS

The transaction costs of lending are high for rural loans, particularly the large majority of small loans. In the branches surveyed, 95 per cent of all loan accounts were below Rs 25,000, and accounted for only 22 per cent of the banks’ business.

0 The delinquency and default rates are high. The resulting erosion in the assets of the banks was not reflected in their accounts up to 1992-93, contributing to systemic complacency in this regard.


Overdues were 43,51 and 41 per cent for NCBs, RRBs and Cooperative Banks (as per the Agricultural Credit Review Committee data for 1986). Since then, the practice of loan melas, interest and loan waivers, has only increased the habit of non-payment. The loan recovery percentage (calculated as the ratio of collections during the period to the sum of current demand and demand in arrears) reported by the sample branches varied between 43 and 59 per cent for priority sector3 loans and 10 to 55 per cent for IRDP loans. There appears to be systematic under- reporting of demand (i.e., loans currently due) at the branch level, in order to report expected levels of collection performance. The study reveals that actual overall collection performance for surveyed branches was in the 20-30 per cent range.

The Reserve Bank of India directed the banks to adopt new norms from 1992-93 (different for large and small loans/less than Rs 25,000), in line with international practice.

The study team’s analysis shows that if the Reserve Bank of India (RBI) income recognition norms were to be applied to all loans whether small or large, the commercial bank investigated for this study would have to derecognize around 20 per cent of its large loan income and about 60per cent of its income from small loans.

Upon application of asset classification and provisioning norms, the net term loan assets (after cumulative provision) would have been lower by about 21 per cent and the provision for the year for 1992-93 would have been 4.1 per cent for the branches for which in-depth analysis was carried out.

The commercial banks are required to be fully in compliance with the new norms effective 1st April 1996. The RRBs have also been directed to adopt these norms in a phased manner, but so far there is no implementation time frame for co-operatives. Similarly, RBI’s directions for small loans accounting are still not in line with international norms.

0 The interest rates have been kept low until recently and even now are capped for loans up to Rs.25,000 by NCBs and RRBs. Various studies have shown that interest rates are below the minimum viable lending rate.

The average annual administrative cost of a loan account works out to 5.0-5.5 per cent of the average loan outstanding of a small loan. On the other hand, the average annual administrative cost of a deposit account works out to 7.5-8 per cent of the average size of a savings deposit account.

The average return on advances for the sample branches for 1992-93 works out to 10.5 per cent. Based on the analysis carried out the minimum cost of lending works out to 19.5 per cent for Regional Rural Banks and 17 per cent for the commercial bank. Even at these lending rates, without financial restructuring, bank operations will not be sustainable for either the NCBs or the RRBs, as the asset portfolio includes accumulated losses (for the RRB) and a large proportion of non-performing assets (estimated at over 50 per cent in the study of bank branches at the first site.)4 Adjusting for this factor substantially increases the required minimum lending rate.

The ‘priority sector’ includes sectors designated as such as per the Government’s development agenda e.g. agriculture, small scale industry and transportation.

Since then, the banks have made substantial provisions. The study believes that still more provisioning (specially in respect of small loans) is required to properly reflect the fair value of the asset portfolio.


The above computation of minimum ending rate does not net off various subsidies received by the banks. If these subsidies were to be removed, the minimum rate of lending would be still higher. One measure of the extent of subsidies given to a financial institution is the Subsidy Dependence Index (SDI).5 The SDI could not be computed for the commercial bank as separate balance sheets are not pre- pared for branches. But for the RRB, based on the audited accounts for the year 1992-93 this was calculated and worked out to 201 per cent. This means that if nothing else were charged, the on-lending rate of the RRB would have to be increased by 201 per cent to reach break-even. The average on-lending rate during that period was 10.8 per cent which would have to go up to 32.5 per cent.

0 Banks find it difficult to post staff to rural branches or to motivate them to work there. RRBs, established as a lower cost channel, have become equally expensive.

For an understanding of the institutional and behavioural reasons for this state of affairs, an intensive study of practices and procedures followed by the participating financial institution was carried out. This was supplemented by an attitudes-survey of rural branch managers and officers.

INTERNAL PRACTICES AND A'ITITUDES

The main conclusions of the study of Internal Practices and Attitudes are as follows: by far the most significant cause for increased access to financial services for the rural poor has been macro-policy changes for the banking sector initiated by the government over the past two decades. However, in imposing these obligations on the banks, adequate attention has not been given to financial sustainability of operations, either in terms of the operating costs or in terms of loan losses.

The study findings show that at the level of individual FIs, one of the main factors constraining performance (access and sustainability) is lack of clear definition of the objectives vis-2-vis performance factors. This lack of clarity is manifest further in the inadequacy of strategic responses by the banks to the various types of lending obligations (rural, priority sector, concessional, sponsored, weaker sections, etc.) mandated by government policy and the near absence of any differentiation in products and services offered to the rural poor or in delivery mechanisms that match the needs of the rural poor. There were few attempts to change systems and procedures or to reorient personnel policies to match the requirements and characteris- tics of the poor as a client group (such as need for consumption loans, prior indebtedness, small loan amounts, sporadic savings, illiteracy, remoteness, etc.).

Findings of the bankers' attitude survey showed that most banks strongly agree with the social banking role, specifically the nationalization of banks, the requirement of lending to priority sector and weaker sections, and concessional interest rates for the poor. However, a majority expressed disagreement with the linking of subsidies (under programmes such as IRDP) with bank loans. A large majority believed that the rural poor and women are either not getting adequate credit or not getting it for appropriate purposes. Though the bank officers appeared slightly favourably inclined towards the rural poor and women as per-

See Yaron (1992).


Table 1. Effect of internal practices and attitudes (IPAs) on institutional performance.

Characteristic Internal Practices and Attitudes Consequences

Self-concept Credit delivery system sees its role as saving the rural people from the clutches of money-lenders.

Attitude towards the rural poor

The poor are seen as a ‘social obliga- tion’ and intrinsically unworthy of credit.

Ownership and control ernment owned.

Commercial banks are largely gov-

RRBs are owned by central and state government and by the sponsor bank which itself is government owned.

Even co-operative banks, which are nominally member-owned are government controlled in practice.

Direct dealings with all clients, no agents used. Fully manual operations, no automation.

Operating methods

Credit is rationed out, with all the consequences including poor quality and corruption. Though RFIs mobilise substantial deposits from rural savers, RFIs see themselves mainly as purveyors of outside funds to rural areas.

Inadequate attention to appropriate products for the poor: the quality of service, low by any standards, is even worse for the poor.

Political and bureaucratic interference in loan decisions.

Increased borrowers’ tendency to default, due to long history of waiver of government loans.

Over-staffing, bureaucratic functioning and poor industrial relations.

High staff costs, yet poor customer service and inadequate management information for performance control.

sons, they did not think the rural poor had much potential as savers and also thought of them as slightly undesirable clients for banks.

Tables 1 and 2 summarize how the Internal Practices and Attitudes (IPAs) and Mechanisms used by the existing RFIs to reach their clients have affected their performance in serving the rural poor and women.

BEST PRACTICES

The main objective of the study was to develop sustainable approaches to the rural poor as a market for financial services. Therefore, considerable effort was spent in reviewing practices (both IPAs and MEAs) in India that could have the potential for replication.

The best practices survey showed that while there have been a large number of attempts (the study shortlisted about 40 for an initial study, of which about 15 were studied in more detail) by formal and informal sector organizations to expand financial services to the rural poor, few pass the twin tests of significantly enhancing access while improving or maintaining financial sustainability .

The formal sector attempts have been primarily in the nature of non-financial


Table 2. Mechanisms that enhance or thwart access by the rural poor and women (MEAs).

~~~ ~

Products and services special needs: urgency, informality, continue to depend on informal

Few products that suit rural people’s

seasonality, illiteracy, livelihood diversity. rates.

Large percentage of rural borrowers

channels for loans, at higher interest

No consumption loans are given, even to borrowers who can repay.

Poor people continue to borrow at very high interest from moneylenders; much of the formal credit received is diverted to consumption.

Excludes those who are asset poor, Method of lending Security based lending; insistence on collateral. particularly landless and women.

Largely one-time loans, except in the case of crop loans.

Borrower has no incentive to repay the first loan.

Interest rate on loans

Lower than sustainable levels: does not cover capital, operating and bad debt costs.

The RRBs have mostly eroded their equity capital due to accumulated losses. Cooperatives have to be con- tinuously supported with budgetary funds.

and financial mechanisms for enhancing access (trainingkounselling and facilita- tion of group formation predominated in the first category, while ‘credit plus’ facilities and product innovations predominated the second). With rare exceptions, these mechanisms did not provide the expected results because they were used without appropriate changes in the structure, systems and orientation of bank staff.

The informal sector attempts have generally used a two-tier structure, with an NGO promoting and supporting self-help groups of the rural poor, who undertake savings and credit activity. Some of these initiatives have been formalized into co- operative or corporate structures while others continue as NGO programmes. After an initial review, some of the more mature programmes (including the SEWA Bank6, a Cooperative Bank; Sarva Jana Sewa Kosh’, a non-banking finance company; CDF Thrift Cooperatives*, PRADAN’ Self Help Groups (SHG) and CRESA’’ SHGs) were studied in greater depth. NABARD, the apex agricultural credit bank, has a pilot project for linking SHGs with banks. This project was also reviewed in some depth. Many of these efforts have demonstrated good performance in increasing access of the rural poor to financial services. But our attempts at establishing independent cost-benefit analysis for these were not successful because we found that the costs of financial and other services accounted for and the benefits were indeterminate or unquantifiable.

Self-Employed Women’s Association (SEWA), an NGO based in Ahmedabad. ’ The Sarva Jane Sewa Kosh is a non-banking finance company established in 1989 by a Ghandian NGO, ASSEFA based in South India. * The Cooperative Development Foundation (CDF) is an intermediary NGO based in Hyderabad which supports the development of genuine co-operative organizations. ’ Professional Assistance for Development Action (PRADAN) is a national level intermediary NGO which supports a variety of initiatives including local credit and savings Self Help Groups (SHGs). lo The Centre for Rural Reconstruction and Social Action (CRESA) is an NGO based in South India.


STUDY CONCLUSIONS

The study findings suggest that RFIs are today faced with a hierarchy of constraints in providing services to the rural poor, and IPAs and MEAs are at the bottom of this heap. Listed below are the study team’s formulation of constraints in ascending order of what an RFI can do about them.

HIERARCHY OF CONSTRAINTS

0 The chronically income deficit nature of the target group (54 and 67 per cent were below the poverty line in the surveys in the two sites) and the inadequacy of livelihood opportunities which would generate a living wage and an income surplus (43 and 49 per cent were agricultural labour- ers, while 43 and 52 per cent said they could not save due to inadequate income).

0 The erosion of the repayment ethic, particularly with respect to loans from formal institutions (only 30 per cent of the sample bank advance accounts were regular, as per the detailed study in the first site). Erosion of the banker-borrower relationship of mutual trust. This has been a major negative consequence of linking up poverty alleviation programmes with bank credit. There has been a spread of corruption in selection of borrowers, and sanction of loans. This has also bred a high degree of cynicism among the bank officials about the poor as creditworthy clients (as reflected by the bank officers’ attitude survey results). This relationship would require mending before any significant new initiatives for lending to the rural poor are launched. The past actions of the government in the creation of multiple state- owned/sponsored channels of credit have created deep-seated patterns of thought and behaviour in the Rural Banking Sector. The rural branches of the nationalised commercial banks, the regional rural banks and the co- operative banks cannot be reorganized or converted into more effective financial institutions overnight. As the government’s halting progress in the matter of RRB reorganization indicates, pressures from trade unions, and possibly later from political lobbies of the land-owning borrowers (who benefit most from subsidised interest and loan and interest waivers), would have to be overcome before restructuring of the rural credit system is attempted.

0 There is system-wide dependence on low-cost capital, operating subsidies and periodic capital infusions to make up for loan losses. The commercial banks are subsidising the operations of their rural branches. According to the study, the subsidy amounted to 20 per cent of the reported income of the surveyed branches. In turn, banks receive a ‘subsidy’ for rural lending in terms of concessional refinance from the apex, which itself survives on low- interest, no-risk capital. Further, banks get reimbursement for bad debts through a credit guarantee programme (even though it costs the banks 1.5 to 2.5 per cent of outstanding and they receive only part of their claims), and reimbursement for loans written off from the central


government (though this has so far been a one-time event, the ARDR Scheme, 1989).

0 The erosion of the RFI’s autonomy. This arises from: (i) the political view of banks as an instrument of state policy; (ii) full government ownership of banks (which results in among other things, the self-concept of banks as ‘public undertakings’ rather than as commercial enterprises); (iii) job security consciousness among the staff and at the operating level; and (iv) increasing tie-up of banks with government development programmes, which in turn leads to further erosion of a commercial ethos and incursion of the ills of the public bureaucracy.

0 Restrictive nature of regulations concerning the operation of the banks. These include high statutory liquidity and cash reserve requirements, low interest rate spreads, particularly for priority sector lending, rural-urban branch ratio maintenance and location licensing. All these cumulatively erode profitability and make rural bank operations non-viable.

0 Failure of the RFIs to adopt institutional practices and attitudes (both internal and on the customer interface) to address the requirements of the rural poor as a customer through policies, products, structure, systems and people. The study concluded that many of the higher level constraints must be addressed before institutional performance (access and sustainability) can be improved by appropriate changes in IPAs and MEAs.

A review of the steps taken by the Government and Reserve Bank of India as part of the financial sector reforms shows that, so far, these have been focused on the regulatory framework within which FIs operate and the adoption of prudent accounting norms. While these are steps in the right direction, the potential gains for the rural poor from these initiatives are likely to be small unless these changes are accompanied (in some cases preceded by):

0 depoliticizing of rural credit (e.g., no blanket loan waivers, amendment in

0 increasing the autonomy of RFI’s professional boards, freedom to select bor-

0 allowing multiple private sector RFIs to come up even as existing govern-

0 revamping the recovery system; 0 increasing the accountability of RFIs (prudent accounting, explicit subsidies,

co-operative laws etc.);

rowers, freedom in staff matters etc.);

ment sector RFIs are given incentive to improve performance;

market-based funds and credit guarantee costs etc).

Finally, there is a need to provide incentives for the existing RFIs to become customer-oriented. This would result in behaviour appropriate for the rural poor market, development of new products, channels and promotional methods based on-the-ground market research and a reorientation of policies and systems in line with this new focus on the customer.

The study team’s formulation of the required (new generation) behaviour to improve access of the rural poor in a sustainable manner can be summarized as the Seven 1’s (Ingredients) of successful Microfinance Programme for the Rural Poor (Table 3).


Table 3. The seven 1’s of successful microfinance programmes for the poor.

Attribute New generation behaviour

Image of the poor Independence

Interest rates

Incentives

Intermediation

Increased capacity

Integration

Not see them as beneficiaries, but as entry-level customers. No political interference, such as loan waivers, no bureaucratic control. For deposits: high enough to attract savings. For loans: high enough to cover costs of funds, cost of operations, cost of loan losses, and cost of equity capital. For staff to ensure good customer service but prudent lending. For customers: to ensure deposits come in and loans are repaid on time. Between local savers and borrowers; and between local surpluses and non-local financial markets. Larger scale; broader scope of services to include savings, consumption and production credit, and insurance; better systems for MIS and internal supervision; and greater ability to deal with regulatory authorities. With social intermediation (e.g. by Self-Help Groups) and technical assistance (e.g. by NGOs and government bodies in microenterprise promotion).

ACKNOWLEDGEMENTS

The authors wish to thank Lynn Bennett and Jacob Yaron of the World Bank for their support and comments during the course of the study. Needless to add, the views expressed herein are those of the authors and do not represent the views of the World Bank or of the institutions, BASIX and Price Waterhouse, for which the authors work.

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