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FINANCIAL SERVICES FOR THE

RURAL POOR AND WOMEN IN INDIA:

ACCESS AND SUSTAINABILITY1

Vijay Mahajan

BASIX

Bharti Gupta Ramola

PRICEWATERHOUSE

Abstract: This paper, based on a study commissioned by the World Bank, reviews the

performance of Indian financial institutions in providing services tot he rural poor and

examines the key issues facing policy makers and institutions as the country moves forwardon 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 thesevariables 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 developingworkable 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 impetus for stateintervention in rural financial markets was provided by the findings of the All India Rural

Credit Survey (Gorwala Committee) which shoed that institutional credit accounted for onlyseven percent of the borrowings of rural households in 1951-1952. For the bottom 30 percent

of households it was as low as four percent. In response, since the fifties, the Government hastaken a variety of initiatives aimed at improving flow of credit to rural areas. These have

included nationalization of commercial banks, establishment of a machinery for subsidizedfinance fore targeted lending, expansion of the three-tier agricultural credit cooperativesystem, establishment of 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.

1The study was managed by the Gender and Poverty (GAP) Team of the Asia Technical Departments Human

Resources and Social Development Division (ASTHR) on behalf of the India Departments Agricultural

Division (SA2AG), Funding for the study was provided by the Japanese and Norwegian governments.


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By certain traditional measures, this strategy has worked well. By March 1993, there were35,360 rural bank branches, of which as many as 34, 370 were opened after 1969. Today,

rural bank branches account for 56 percent of the branch net work of commercial banks, each

rural branch serving an average of 3,200 households. The co-operative structure with over

100,000 primary agricultural cooperatives provides more intensive penetration. As of 31March 1993, rural deposits accounted for 15 percent of the total deposits (23 percent of

incremental deposits after 1969). Commercial bank outstanding credit to rural areas was

approximately Rs 230 billion, or around 14 percent of the total credit (with the co-operativesystem having an additional credit outstanding of around Rs 80 billion). The overall credit-

deposit (C-D) ration for rural areas was 77.0 percent as against the national C-D ration of

57.7 percent2. 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 FINACE 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 figure1). 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 par to theeffort. 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 indeedreduce 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 thepotential market for financial services provided to the rural poor, identify constraints to

realizing the potential and develop workable approaches to reducing the constraints and

extending services to the rural poor in a financially sustainable manner. The study wascarried 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 service providers (banks, co-operatives, insurance companies, private financiers, moneylenders, self-help groups, NGOs,

etc).

2This number is close to the theoretical maximum as India continues to have large statutory/cash reserve

requirements.


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The study components included:

a survey to determine the pattern of demand and supply of financial services for the ruralpoor and women:

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;

a study of institutional practices and attitudes (IPAs) of bank officals who deal with therural poor and women as clients;

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

development of a set of financial sectors with various assumptions about policy andoperating 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 branchofficers 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 financials of NCBs and a number of RRBs andcooperative institutions.

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

CONCEPTUAL FRAMEWORK

The study posited a conceptual framework (see Figure) 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 variation across FIsin access and sustainability through causal variables described as Institutional Practices and


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Attitudes (IPAs), internal to the FI, and Mechanisms that Enhance/Thwart 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 (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 someextent 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 ruralpoor 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 enumeratedbelow:

Sustainability

High Desired effect of policyinitiatives

4

Access

Low High

The effect of policy

Initiatives since 1969 Low

PROBLEMS OF CUSTOMERS

Credit from RFIs is not easily available, despite the network expansion. A largeproportion 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 he borrower. However, theseloans 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.


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Box 1. 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 amongthe rural poor is as follows: consumption credit, savings, production credit, andinsurance. 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, interms of interest rates (varying from 32 to 92 percent). 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 alsocooperatives, at relatively low interest rates (around 12 percent nominal, or 2 percent

real).

The overall source/use 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

FormalInformal

Total

1621

37

063

63

1684

100

Note: Figures are percentages of total credit usage.

Transaction costs of borrowing are high. The study shows these to be in the range of 17to 22 percent 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 alltaken into account. If, in addition the wage loss due to time spent in getting the loans is

accounted for the transaction costs are even higher. The effective interest rate works out

to 26 to 38 percent depending on the loan period if transaction costs are taken intoaccount. Thus, the transaction cost adjusted interest rate comes close tot he lower range

of the informal sector interest rate. However, since transaction costs have partlyballoned because of the subsidy linked with the loans, the effective rate of interest need sto take subsidy into account. With 33 percent subsidy, the effective interest rate varies

from 3.6 to 6.5 percent. With 50 percent subsidy, the interest rate in fact becomes

negative.

Transaction costs for using savings facilities are also high. If wage loss for the timetaken to go to the bank is taken into account. Based on the survey, this cost is estimated at

about 15 percent of the average monthly savings assuming that the savings account is

operated once a month.


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There are persistent complaints regarding inadequacy of the loan amount, rigidity ofterms and the lack of timeliness of formal credit. These factors, along with high

transaction costs, negate the effects of low interest rates. Only 30 percent of theborrowers 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 form banks of

lower income groups (although credit cards and consumer loans are now available to

higher income borrowers). From the data, it was inferred that between half and tow-thirdsof 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. 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 money lender loans.

The extent credit to specially disadvantaged groups such as the landless, artisans andwomen is very limited. For example, only 2 7 percent 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 percent of the

borrowers were women (accounting for 9 percent of loan amounts advanced). Thelandless and women also have a major access disadvantages since they are unable to offer

land as a collateral.

Box 2h

Utilization and repayment behaviour of rural borrowers.

Of the 600 respondents canvassed. Only 12 percent 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 percent did not have theasset any longer; of which

16 percent did not purchase the asset 57 percent bought it, but sold it off subsequently 27 percent responded that the asset died (in the case of cattle loan) or stopped

functioning.

Of those who had taken a loan, 92 percent did not know the interest rate 28 percent did not know the repayment amount 29 percent did not know the balance outstanding.

These statistics were not very different for women. However, misuse and low levels ofawareness were more pronounced for IRDP loans.


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THE PROBLEMS OF RFIS

The transaction costs of lending are high for rural loans, particularly the large majorityof small loans. In the branches survyed, 95 percent of all loan account were below Rs

25000, and accounted for only 22 percent of the banks business.

The delinquency and default rates are high. The resulting erosion in the assets of thebanks were not reflected in their accounts up to 1992 93, contributing to systemiccomplacency in this regard.

Overdues were 43, 51 and 41 percent for NCBs, RRBs, and Co-operative Banks (as per theAgricultural 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 59percent for priority sector3 loans and 10 to 55 percent of 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 over allcollection performance of surveyed branches was in the 20-30 percent 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), inline with international practice.

The study teams 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 percent of its large loan

income and about 60 percent of its income from small loans.

Upon application of asset classification and provisioning norms, the net term loan assts (aftercumulative provision) would have been lower by about 21 percent and the provisions for the

year for 1992-93 would have been 4.1 percent for the branches for which in-depth analysis

was carried out.

The commercial banks are required to 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, butso far there is no implementation time frame for co-operatives. Similarly, RBIs directions

for small loans accounting are still not in line with international norms.

The interest rates have been kept low untill recently and even now are capped for loansup to Rs 25,000 by NCBs and RRBs. Various studies have shown the interest rates arebelow the minimum viable lending rate.

The average annual administrative cost of a loan account works out to 5.0-5.5 percent of the

average loan outstanding of a small loan. On the other hand, the average annual

3The priority sector includes sectors designated as such as per the Governments development agenda e.g.

agriculture, small scale industry and transportation.


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administrative cost of a deposit accounts works out to 7.5-8 percent 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

percent. Based on the analysis carried out the minimum cost of lending works out to 19.5

percent for Regional Rural Banks and 17 percent for the commercial bank. Even at theselending 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 perce3nt in thestudy of bank branches at the first site)4. Adjusting for this factor substantially increases the

required minimum lending rate.

The above computation of minimum lending 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 financial institution is theSubsidy Dependence Index.5 The SDI could not be computed for the commercial bank as

separate balance sheets are not prepared for branches. But for the RRB, based on the auditedaccounts for the year 1992-93 this was calculated and worked out to 201 percent. This meansthat if nothing else were charged, the on-lending rate fo the RRB would have to be increased

by 201 percent to reach break-even. The average on-lending rate during that period was 10.8

percent, which would have to go up to 32.5 percent.

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, anintensive study of practices and procedures followed by the participating financial

institutions was carried out. This was supplemented by an attitudes-survey of rural branchmanagers and officers.

INTERNAL PRACTICES AND ATTTITUDES

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 hasnot 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-a-vis performance factors. This lack of clarity is manifest further in theinadequacy of strategic responses by the banks to the various types of lending obligations

(rural, priority sector, concessional, sponsored, weaker sections, etc.) mandated by

4Since then, the banks have made substantial provision. 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.5

See Yaron (1992)


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government policy and the near absence of nay 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 characteristics 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 topriority 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 eithernot getting adequate credit or not getting it for appropriate purposes. Though the bank

officers appeared slightly favorably inclined towards the rural poor and women as persons,

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

Tables 1 and 2 summarize how the Internal Practices and Attitudes (IPAs) and Mechanismused by the existing RFIs to reach their clients have effected their performance in serving the

rural poor and women.

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 roles

as saving the rural people from theclutches of money-lenders

Credit is rationed out, with all the

consequences including poorquality and corruption. Though

RFIS mobilise substantial

deposits from rural savers. RFIssee themselves mainly as

purveyors of outside funds to

rural areas.

Attitude

towards the

rural poor

The poor are seen as a social

obligation and intrinsically

unworthy of credit.

Inadequate attention to

appropriate products for the poor;

the quality of service, low by anystandards, is even worse for the

poor.

Ownershipand control Commercial banks are largelygovernment owned. Political and bureaucraticinterference in loan decisions.

RRBs are owned by central and state

government and by the sponsor bank

which itself is government owned

Increased borrowers tendency to

default, due to long history of

waiver of government loans.

Even co-operative banks, which are

nominally member-owned are

government controlled in practice.

Over-staffing bureaucratic

functioning and poor industrial

relations.


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Operating

methods

Direct dealings with all clients. No

agents used. Fully manual

operations, no automation

High staff costs. Yet poor

customer service and inadequate

management information forperformance control.

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 (thestudy short listed 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.

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

Products and

services

Few products that suit rural

peoples special needs: urgency,

informality, seasonality, illiteracy,

livelihood diversity

Large percentage of rural

borrowers continue to

depend on informal channels

for loans at higher interestrates.

No consumption loans are given

even to borrowers who can repay.

Poor people continue to

borrow at very high interestfrom money lenders; much

of the formal credit receivedis diverted to consumption

Method of lending Security based lending; insistence

on collateral

Excludes those who are asset

poor, particularly landlessand 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 baddebt costs.

The RRBs have mostly

eroded their equity capitaldue to accumulated losses.

Cooperatives have to be

continuously supported withbudgetary funds.

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

mechanisms for enhancing access (training/counselling and facilitation of group formation

predominated in the first category, while credit plus facilities and product innovationspredominated the second). With rate exceptions, these mechanisms did not provide the


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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 cooperative or corporatestructures while other continues as NGO programmes. After an initial review, some of the

more mature programmes (including the SEWA Bank6, a Cooperative Bank: Sarva Jana

Sewa Kosh7

a non-banking finance company; CDF Thrift Cooperatives8, PRADAN

9Self

Help Groups (SHG) and CRESA10 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 inincreasing access of the rural poor to financial services. But our attempts at establishing

independent cost-benefit analysis for these we4re not successful because we found that the

costs of financial and other services accounted for and the benefits were indeterminate orunquantifiable.

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 teams formulation of constraints in ascending order of what anRFI can do about them.

HIERARCHY OF CONSTRAINTS

The chronically income deficit nature of the target group ( 54 and 67 percent wrebelow the poverty line in the surveys in the two sites ) and the inadequacy of livelihoodopportunities which would generate a living wage and an income surplus (43 and 49percent were agricultural labourers, while 43 and 52 percent said they could not save due

to inadequate income).

The erosion of the repayment ethic, particularly with respect to loans from formalinstitutions (only 30 percent of the sample bank advance accounts were regular, as per thedetailed study in the first site).

Erosion of the banker-borrower relationship of mutual trust. This has been a majornegative 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 he poor as

creditworthy clients (as reflected by the bank officers attitude survey results). This

6Self- Employed Womens Associations (SEWA) an NGO based in Ahmedabad

7The Sarva Jana Sewa Kosh is a non-banking finance company established in 1989 by a Gandhian NGO.

ASSEFA based in south India.8

The Cooperative Development Founda;tion (CDF) is an intermediary NGO based in Hyderabad which

supports the development of genuine cooperative organizations.9

Professional Assistance Development Action (PRADAN) is a national level intermediary NGO which

supports a variety of initiatives including local credit and savings Self-Help Groups (SHGs).

10The Centre for Rural Reconstruction and Social Action (CRESA) is a NGO based in South India.


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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 /sponsoredchannels 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 cooperative banks cannot be reorganized or converted intomore effective financial institutions overnight. As the governments halting progress in

the matter of RRB reorganization indicates, pressure from trade unions, and possibly later

from political lobbies of the land-owning borrowers (who benefit most from subsidisedinterest and loan and interest waivers would have to be overcome before restructuring of

the rural credit system is attempted.

There is system-wide dependence on low-cost capital, operating subsidies and periodiccapital infusions to make up for loan losses. The commercial banks are subsidising theoperations of their rural branches. According to the study, the subsidy amounted to 20

percent 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 debtsthrough a credit guarantee programme (even though it costs the banks 1.5 to 2.5 percent

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, theARDR Scheme, 1989).

The erosion of the RFIs autonomy. This arises from (i) the political view of banks as aninstrument 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 ascommercial enterprises); (iii) job security consciousness among the staff and a 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. Restrictive nature of regulations concerning the operations of the banks. These include

high statutory liquidity and cash reserve requirements, low interest rate spreads,

particularly for priority sector lending, rural-urban branch ration maintenance andlocation licensing. All these cumulatively erode profitability and make rural bank

operations non-viable.

Failure of the RFIs to adopt institutional practices and attitudes (both internal and on thecustomer 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 thefinancial sector reforms shows that, so far, these have been focused on the regulatoryframework 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):

Depoliticizing of rural credit (e.g. no blanket loan waivers, amendment in co-operativelaws etc.)


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Increasing the autonomy of RFIs professional boards, freedom to select borrowers,freedom in staff matters etc.)

Allowing multiple private sector RFIs to come up even as existing government sector FISare given incentive to improve performance:

Revamping the recovery system Increasing the accountability of RFIs (prudent accounting, explicit subsidies, 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 researchand a reorientation of policies and systems in line with this new focus on the customer.

The study teams formulation of the required (new generation) behaviour to improve accessof the rural poor in a sustainable manner can be summarized as the seven Is (Ingredients) of

successful Microfinance Programme for the Rural Poor (Table 3)

Table 3: The seven Is of successful micro-finance programmes for the poor.

Attribute New Generation behaviour

Image of the poor Not see them as the beneficiaries, but as entry level customers

Independence No political interference, such as loan waivers, no bureacuraticcontrol

Interest rates For deposits: high enough to attract savings. For loans; high

enough to cover costs of funds, cost of operations, cost of loanlosses, and cost of equity capital.

Incentives For staff: to ensure good customer service but prudent lending. For

customers: to ensure deposits come in and loans are repaid on time

Intermediation Between local savers and borrowers; and between local surpluses

and non-local financial markets.

Increased capacity 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 withregulatory authorities.

Integration With social intermediation (e.g. by Self-Help Groups) and technical

assistance (e.g. by NGOs and government bodies in micro-enterprise promotion.)

ACKNOWLEDGEMENTS


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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 view expressedtherein 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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