Rural Finance - InstitutionsInstitutionsOrganizational structurePoliciesOutcomeInnovations

Rural Finance - InstitutionsPrivate moneylenders/traders/landlords- Promptness of services- supply loan and receive payments in variety of forms and size- No or hardly any marketable collateral- Interlinking of credit transaction- Successful use of borrowers credit records- Proper monitoring of loans- vary high interest rate- perpetual indebt ness of borrowers- still occupy a dominant role in rural financial market

Rural Finance - InstitutionsCooperative credit institutions - Separate institutions for short term and long term credit - Three tier structure for short term credit- State cooperative banks- District central cooperative banks- Primary agriculture credit societies

Rural Finance - InstitutionsRegistered under cooperative society act 1904Financial partnership by state in 1954Large membership but heterogeneousPeoples own organizationBased on members contribution of fundsPACS, FSS and LAMPS

Categories of PACS

Features PACSFSSLAMPSArea CoverageNot less than 2000 hectares of cropped areaExtending up to Block or population of 10,000A Block or a thesilBeneficiaries FarmersFarmers and other rural householdsTribalsCredit BusinessST and MT loans for agricultureMulti-purpose creditST/MT loans including consumption loansNon-credit BusinessSupply of farm inputs, PDSPackage of servicesPackage of services

Rural Finance - InstitutionsThe share of cooperatives in agriculture credit has declined from 77 percent in 1970-71 to about 30 per centThe borrowing members are only 24 percentThe average deposit per society is as low as Rs. 650 in Bihar to Rs. 7000 in West Bengal and MaharashtraLoan business: most of the cases Rs. 2,00,000 against the viability norm of Rs. 10,00,000High dependence on govt. for share capital except in case of Gujarat and Maharashtra

Rural Finance - InstitutionsTwo-tier system for Cooperative Long-term creditState land development banksPrimary land development banksFinance land based activities like minor irrigation, farm mechanization and land improvement

Rural Finance - InstitutionsCommercial Banks- Nationalized in 1969- branch expansion in rural areas- credit quota- 40 percent of credit to priority sector- 40 percent of priority sector credit to agriculture sector- concessional interest rate on lending

Rural Finance - InstitutionsRegional Rural banks- established in 1975- cheaper rural wing of commercial banks- local feel and familiarity along with degree of business organization- each RRB was sponsored by a commercial banks- source of fund: sponsored bank 35%; central govt. 50 %; state govt. 15 %- lending to only priority sector and mostly ST loans- out of 196 RRBs, 152 are in loss

Rural Finance - InstitutionsRBI/NABARD- Regulatory institutions- Provide refinance - training, monitoring and inspection- Commercial banks are under the control of RBI- RRBs and Cooperatives banks are under the control of NABARD

Rural Finance - InstitutionsTotal retail rural finance outlets = 152, 692Number of villages/outlet = 4.31Rural population/outlet = 4,122If exclude PACSRetail rural finance outlets = 60792No. of villages/outlets = 9.74Rural population/outlet = 10,431

Rural Finance - InstitutionsLow access High overdues (low recovery)High transaction costHigh subsidy with low interest rateSavings ignoredTarget oriented or supply drivenLow margin or lossLow sustainability

Design of Official Rural Financial Services

AssumptionsCharacteristics OutcomeRural poor do not have capacity to saveNo emphasis on savingsInaccessible for majority of rural people Need credit on concessionary rate of interestSubsidized creditPoor quality of lendingNeed subsidy linked creditComplicated procedureLeakages and diversion of creditNeed guidance about economic activities to be undertakenOnly Production creditLow recovery Fixed repayment normsHigh transaction cost both to borrowers and lendersTarget orientedLoss of Financial sustainabilityOccasional write-offs

Primary Features of the Old and New Paradigms

FeaturesDirected Credit Paradigm Financial Market ParadigmProblem definitionOvercome market imperfectionsLower risks and transaction costsRole of financial marketsPromote new technologyStimulate ProductionImplement State plansHelp the poorIntermediate resources more efficientlyView of usersBorrowers as beneficiaries selected by targeting Borrowers and depositors as clients choosing productsSubsidiesLarge subsidies through interest rates and loan defaultCreate subsidy dependenceFew subsidies Create independent institutions

Primary Features of the Old and New Paradigms(Contd)

FeaturesDirected Credit Paradigm Financial Market ParadigmSources of fundsGovernments and donorsMostly voluntary depositsAssociated information systems Designed for donorsDesigned for managementSustainability Largely ignored A major concernEvaluations Credit impact on beneficiaries Performance of financial institutions