Rural Financial Institutions in India: An Analysis of History and Current Landscape

1. FAO Conference, March 2007Rural Finance Research Rural Financial Institutions and Agents in India: A Historical and Contemporary Comparative Analysis Howard Jones, School of Agriculture, Policy and Development, University of Reading, UK Yashwant Thorat, Chairman, National Bank for Agriculture and Rural Development, India. Marylin Williams, School of Psychology and Clinical Language Sciences, University of Reading, UK.

2. Objectives of Study • The paper and presentation is not based on a single piece of research in India but draws upon: • Research on the rural informal financial sector • Research on the history of the institutionalisation of rural credit provision • Research on identifying and addressing attitudinal constraints in the provision of financial services • Membership of Government Committees (Y.Thorat) addressing different aspects of rural financial exclusion

3. Relevance to Conference 1 • Rural Informal Finance • Rural Informal Agents have not disappeared • Tells us a great deal about the financial service needs of the rural poor • Shows us what informal agents are doing “right” enabling us to see what rural formal financial institutions are doing “wrong” • Informs us of existing and potential linkages between informal agents and formal financial institutions

4. Relevance to Conference 2 • History of formal rural credit provision • Policy for rural credit provision still shaped/influenced by historical imperatives • Imperative to compete away the moneylender following the Deccan Riots of 1875 - led to a long history of Institutionalisation of rural credit provision • The successive enchantment, disenchantment and attempts to improve different institutional forms (cooperatives, commercial banks, regional rural banks) leads us to question the extent to which policy is influenced by learning from experience?

5. Relevance to Conference 3 • Interface between Clients and Rural Financial Institutions (RFIs) • Attitudinal constraints on the part of bank staff reported to be a barrier to the provision of financial services to the poor • One DFID funded project in India was concerned with identifying possible attitudinal constraints • A second DFID funded project addressed such constraints through innovative training

6. Research Methods • The different studies have used a variety of research approaches • Investigation of informal finance largely based on an anthropological study of moneylenders and rural livelihoods • Research on historical and current financial service provision based on literature/document reviews, and expert sources • Research addressing attitudes based on surveys, using quantitative and qualitative methods

7. Major Findings 1 Informal Finance • The share of informal finance in total rural household debt, decreased substantially from the 1950s to the early 1980s, levelled out from the early 1980s to the early 1990s, and increased from 1990s to 2001 • More specifically, the share of rural moneylender debt increased from 18% in 1991 to 30% in 2002 • Village studies (Jones, 2006) show that, in terms of many factors, formal financial institutions complement rather than substitute for informal agents

8. Major Findings 2 History of Rural Formal Credit Provision • Parallels between historical imperatives to institutionalise rural credit provision and present day concerns with farmer suicides, and moneylender/MFI credit • From the 1950s, Cooperatives were the first institutional vehicle of choice • By the 1960s, Cooperatives were showing problems of overdues, politicisation, poor governance and relatively little lending to the rural poor

9. Major Findings 3 History of Rural Formal Credit Provision (2) • Pressures to identify institutions to complement coops • 1969, major commercial banks nationalised • Huge expansion of rural banking infrastructure • But still high % of the rural population financially excluded • Following the Narsimham Committee in 1975, Regional Rural Banks (RRBs) formed, to combine the best features of cooperatives and commercial banks

10. Major Findings 4 History of Rural Formal Credit Provision (3) • Rapid expansion of RRBs from five in 1975 to 196 in 2003 (14,522 branches) • As for cooperatives and commercial banks, this new type of financial institution did not live up to expectations regarding provision of financial services to the rural poor • High co-variance of risk, the mandate to lend only to weaker sections of society and subsequent pay-scale parity with commercial banks for example, led to systemic weaknesses and substantial losses

11. Major Findings 5 History of Rural Formal Credit Provision (4) • The reform process in the 1990s sought to improve the efficiency and productivity of all rural credit institutions • This was to be through greater commercial freedom, changes in incentive regimes, relaxation of lending controls and the restructuring and recapitalisation of the RRBs • With RFIs reluctant to lend directly to the rural poor, the late 1980s and early 1990s saw the beginnings of the Self Help Group (SHG)-Bank Linkage Programme

12. Major Findings 6 History of Rural Formal Credit Provision (5) • The SHG programme involves 3 partners: the SHGs, the Banks and NGOs • Currently over 2 million SHGs in rural India • Challenges in terms of concentration of SHGs in southern states, lack of legal status, migration to other groups, elite capture, limited scale of lending

13. Major Findings 7 History of Rural Formal Credit Provision (6) • Expanding numbers of MFIs in the 1990s • Total number of MFI clients estimated to be around half a million in 2002 • Only about 12 MFIs have an outreach of around 100,000 clients • Issues of sustainability and capital constraints identified by Thorat (2006) • Entry of private sector banks (e.g. ICICI Bank) with MFI partnership model

14. Major Findings 8 Interface between Clients and RFIs • The majority of rural bank managers interviewed in Project 1 had negative attitudes towards lending to the poor, and many felt negative about themselves, their work roles and situations • The more trainings the managers had received, the more positive their attitudes overall • The design, implementation and testing of an innovative training programme showed improvements in overall attitudes

15. Policy Implications (1) Rural Informal Finance • Over one hundred years of institutionalisation of rural credit has not competed away the moneylenders • Rather than condemning informal agents we can learn from them (in terms of rural financial needs, products and processes) • We can consider how to incorporate informal best practice in the formal sector and/or link the two • The Committee on Moneylender Legislation is a new and innovative departure

16. Policy Implications (2) History of Rural Credit Provision • Rural Financial Institutions not born in a vacuum and late 19th Century policy imperatives remain evident • Rural credit provision shows successive enchantment and disenchantment with different institutional forms • History shows there has been a readiness to acknowledge institutional weaknesses and attempts to address these • Recent committees on rural finance seek to build upon and improve the financial architecture already in place

17. Policy Implications (3) Interface between Clients and RFIs • Rural Bank staff can have a range of negative attitudes towards their professional roles as providers of financial services to the poor • Innovative training can help address these negative attitudes • Involvement by senior banking officials in the two research projects was essential both to securing financial sector buy-in to the research, and to eventual mainstreaming of training modules

18. Conclusions • The GOI draws on a wide range of research findings and data sets in policy deliberations • Research encompasses more than just academic activities • At the individual research project level, active involvement by senior officials helps move research into policy • History informs us not only of past failures (and successes), but also of present imperatives and challenges

19. GRAZIE