With a few simple tweaks, rural banking can be made both viable and result-oriented. But for this, political will is needed

The Government is planning a mega revamp of the regional rural banks (RRBs) and that includes consolidation for better operational efficiencies. In the budget 2019-20, it allocated Rs 236 crore towards the capitalisation of RRBs. There are 56 operational RRBs and the roadmap is to bring them down to 38 or below. There were 196 RRBs after the concept was originally introduced in 1975, to ensure access of affordable credit to the rural population.

RRBs were set up to eliminate other unorganised financial institutions like money lenders and supplement the efforts of co-operative banks. Although RRBs have performed commendably, in recent years, they have lost sheen on account of their inability to preserve the low-cost model and raise capital. RRBs have not been able to attract bright talent. Poor leadership has retarded their mission and vision. Issues relating to governance, suitability of design of products and staff productivity continue to stifle their growth. At present, the Central Government holds half the stake in RRBs. Sponsor banks own 35 per cent and the rest 15 per cent is with the State Governments.

While the Government’s renewed rural focus is laudable, some important caveats must be in place. It is true that banks can play an important role in the financial transformation of low-income communities, but sustainability should never be overlooked. In their excitement to oblige their constituencies, politicians run financially amok and literally plunder banks for vote-banks. This was precisely the reason why India’s post-nationalisation mass banking programmes degenerated into populist agenda, which financially ruined the banks.

All these highlight how an unenlightened politician can play havoc with the financial systems. The entire execution lacked the soul of a genuine economic revolution because it was not conceived by grassroot agents but was assembled by starry-eyed mandarins, who had picked up bits and pieces about financial inclusion from pompous new-fangled and half-baked ideas generated at seminars and conferences. Cheap loans, followed with periodical waivers and write-offs, have been the hobby horse of eye-on-the-ball experts and lazy policy-makers.

The original banking concept, based on security-oriented lending, was broadened after the nationalisation of banks to a social banking concept based on purpose-oriented credit for development. This called for a shift from urban to rural-oriented lending. Social banking was conceptualised as “better the village, better the nation.” However, opening new branches in rural areas without proper expansion, planning and supervision of end use of credit, or creation of basic infrastructure facilities meant that branches remained mere flag-posts. It was a make-believe revolution that was to lead to a serious financial crisis in the years to come.

The Integrated Rural Development Programme (IRDP) is a grim reminder of how mechanically trying to meet targets can undermine the integrity of a social revolution to such an extent that a counter-revolution can be set into motion. Arguably, India’s worst-ever development scheme, the Integrated Rural Development Programme (IRDP), was intended to provide income-generating assets to the rural poor through the provision of cheap bank credit. Little support was provided for skill-formation, access to inputs, markets and necessary infrastructure.

In the case of cattle loans, for example, a majority of cattle owners reported that either they had sold off the animals bought with the loan or that those animals were dead. Cattle loans were financed without adequate attention to other details involved in cattle care: Fodder availability, veterinary infrastructure and marketing linkages for milk among others.

People erroneously came to believe that the State had all the answers to their problems. Governments, international financial institutions and non-governmental organisations (NGOs) threw vast amounts of money at credit-based solutions to rural poverty, particularly in the wake of the World Bank’s 1990 initiative to put poverty reduction at the head of its development priorities. Yet, those responsible for such transfers, had — and in many cases continue to have — only the haziest grasp of the unique demands and difficulties of rural banking.

Working for the poor does not mean indiscriminately thrusting money down their throats. Unfortunately, IRDP did precisely that. The programme did not attempt to ascertain whether the loan provided would lead to the creation of a viable long-term asset. Nor did it attempt to create the necessary forward and backward linkages to supply raw material or establish marketing linkages for the produce. Little information was collected on the intended beneficiary. The IRDP was principally an instrument for powerful local bosses to opportunistically distribute political largesse. The abiding legacy of the programme for India’s poor has been that millions have become bank defaulters through no fault of their own.

Today, the people so marked find it impossible to re-join the formal credit stream. The entire notion of economic revitalisation became a kind of code: It’s a formulation that isn’t taken literally and one that worked wonderfully well to bring all the anti-poverty players together at a time when the world’s energies were focussed on ending poverty. Juicy numbers are music to the ears of bosses. Numbers have been a great obsession with Indian planners in particular. Number of men and women sterilised, contraceptives circulated, wells dug, toilets constructed, villages screened for polio, TB or malaria, children enrolled in schools and saplings planted… there is no accountability for fudged figures. In fact, majority of the rewards are given to officers most adept at massaging figures. The game of numbers, without a concurrent focus on social performance and evaluation of quality of assets created, has been the bane of most credit programmes for poverty reduction and self-employment. 

There are two basic pre-requisites of poverty eradication programmes. First, reorientation of agricultural relations so that the ownership of land is shared by a larger section of the people. Second, programmes for alleviating poverty cannot succeed in an economy plagued by corruption, inflation and inefficient bureaucracy.

A poverty eradication programme must mop up the surplus with the elite classes. These two pre-requisites call for strong political will to implement the much-needed structural reforms. Besides, the Government must aim at a strategy for the development of the social sector — the key component should be population control, universal primary education, family welfare and job creation, especially in rural areas. These and other aspects of poverty alleviation have not received any importance so far in our planning policy making.

During the massive banking expansion phase in the 1980s, opening a bank branch was made to look as casual as punching a flag post. It was impossible to locate a proper structure to house the bank. The existence of a toilet or a medical centre, a police post or a primary school in a village, as a precondition for a bank branch, was simply overlooked. In several cases where the expiry of Reserve Bank of India (RBI) licence for the opening of the bank branch approached without proper premises being identified, banks were housed in a temple or a local community centre, marked by a small banner and a photograph screened as evidence of the launch of the bank’s operations.

Rural branch expansion during that period may have accounted for substantial poverty reduction, largely through an increase in non-agricultural activities, which experienced higher returns than agriculture, and especially through an increase in unregistered or informal manufacturing activities. But there was a significant downside; commercial banks incurred large losses on account of subsidised interest rates and high loan losses — indicating potential longer-term damage to the credit culture.

Rural finance programmes should have substantial inputs from rural sociology as part of the training kit for rural managers. Rural Banking requires greater insight into rural sociology than banking practices as far as finance is concerned. A basic knowledge is adequate to handle these simple credit proposals. It is only in case of high-tech agriculture that technical skills and expertise are required. With a few simple tweaks, social banking can be made both viable and result-oriented. We should not commit the mistake of throwing the baby out with the bathwater.

(The writer is member, NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women)

Writer: Moin Qazi

Courtesy: The Pioneer

With a few simple tweaks, rural banking can be made both viable and result-oriented. But for this, political will is needed

The Government is planning a mega revamp of the regional rural banks (RRBs) and that includes consolidation for better operational efficiencies. In the budget 2019-20, it allocated Rs 236 crore towards the capitalisation of RRBs. There are 56 operational RRBs and the roadmap is to bring them down to 38 or below. There were 196 RRBs after the concept was originally introduced in 1975, to ensure access of affordable credit to the rural population.

RRBs were set up to eliminate other unorganised financial institutions like money lenders and supplement the efforts of co-operative banks. Although RRBs have performed commendably, in recent years, they have lost sheen on account of their inability to preserve the low-cost model and raise capital. RRBs have not been able to attract bright talent. Poor leadership has retarded their mission and vision. Issues relating to governance, suitability of design of products and staff productivity continue to stifle their growth. At present, the Central Government holds half the stake in RRBs. Sponsor banks own 35 per cent and the rest 15 per cent is with the State Governments.

While the Government’s renewed rural focus is laudable, some important caveats must be in place. It is true that banks can play an important role in the financial transformation of low-income communities, but sustainability should never be overlooked. In their excitement to oblige their constituencies, politicians run financially amok and literally plunder banks for vote-banks. This was precisely the reason why India’s post-nationalisation mass banking programmes degenerated into populist agenda, which financially ruined the banks.

All these highlight how an unenlightened politician can play havoc with the financial systems. The entire execution lacked the soul of a genuine economic revolution because it was not conceived by grassroot agents but was assembled by starry-eyed mandarins, who had picked up bits and pieces about financial inclusion from pompous new-fangled and half-baked ideas generated at seminars and conferences. Cheap loans, followed with periodical waivers and write-offs, have been the hobby horse of eye-on-the-ball experts and lazy policy-makers.

The original banking concept, based on security-oriented lending, was broadened after the nationalisation of banks to a social banking concept based on purpose-oriented credit for development. This called for a shift from urban to rural-oriented lending. Social banking was conceptualised as “better the village, better the nation.” However, opening new branches in rural areas without proper expansion, planning and supervision of end use of credit, or creation of basic infrastructure facilities meant that branches remained mere flag-posts. It was a make-believe revolution that was to lead to a serious financial crisis in the years to come.

The Integrated Rural Development Programme (IRDP) is a grim reminder of how mechanically trying to meet targets can undermine the integrity of a social revolution to such an extent that a counter-revolution can be set into motion. Arguably, India’s worst-ever development scheme, the Integrated Rural Development Programme (IRDP), was intended to provide income-generating assets to the rural poor through the provision of cheap bank credit. Little support was provided for skill-formation, access to inputs, markets and necessary infrastructure.

In the case of cattle loans, for example, a majority of cattle owners reported that either they had sold off the animals bought with the loan or that those animals were dead. Cattle loans were financed without adequate attention to other details involved in cattle care: Fodder availability, veterinary infrastructure and marketing linkages for milk among others.

People erroneously came to believe that the State had all the answers to their problems. Governments, international financial institutions and non-governmental organisations (NGOs) threw vast amounts of money at credit-based solutions to rural poverty, particularly in the wake of the World Bank’s 1990 initiative to put poverty reduction at the head of its development priorities. Yet, those responsible for such transfers, had — and in many cases continue to have — only the haziest grasp of the unique demands and difficulties of rural banking.

Working for the poor does not mean indiscriminately thrusting money down their throats. Unfortunately, IRDP did precisely that. The programme did not attempt to ascertain whether the loan provided would lead to the creation of a viable long-term asset. Nor did it attempt to create the necessary forward and backward linkages to supply raw material or establish marketing linkages for the produce. Little information was collected on the intended beneficiary. The IRDP was principally an instrument for powerful local bosses to opportunistically distribute political largesse. The abiding legacy of the programme for India’s poor has been that millions have become bank defaulters through no fault of their own.

Today, the people so marked find it impossible to re-join the formal credit stream. The entire notion of economic revitalisation became a kind of code: It’s a formulation that isn’t taken literally and one that worked wonderfully well to bring all the anti-poverty players together at a time when the world’s energies were focussed on ending poverty. Juicy numbers are music to the ears of bosses. Numbers have been a great obsession with Indian planners in particular. Number of men and women sterilised, contraceptives circulated, wells dug, toilets constructed, villages screened for polio, TB or malaria, children enrolled in schools and saplings planted… there is no accountability for fudged figures. In fact, majority of the rewards are given to officers most adept at massaging figures. The game of numbers, without a concurrent focus on social performance and evaluation of quality of assets created, has been the bane of most credit programmes for poverty reduction and self-employment. 

There are two basic pre-requisites of poverty eradication programmes. First, reorientation of agricultural relations so that the ownership of land is shared by a larger section of the people. Second, programmes for alleviating poverty cannot succeed in an economy plagued by corruption, inflation and inefficient bureaucracy.

A poverty eradication programme must mop up the surplus with the elite classes. These two pre-requisites call for strong political will to implement the much-needed structural reforms. Besides, the Government must aim at a strategy for the development of the social sector — the key component should be population control, universal primary education, family welfare and job creation, especially in rural areas. These and other aspects of poverty alleviation have not received any importance so far in our planning policy making.

During the massive banking expansion phase in the 1980s, opening a bank branch was made to look as casual as punching a flag post. It was impossible to locate a proper structure to house the bank. The existence of a toilet or a medical centre, a police post or a primary school in a village, as a precondition for a bank branch, was simply overlooked. In several cases where the expiry of Reserve Bank of India (RBI) licence for the opening of the bank branch approached without proper premises being identified, banks were housed in a temple or a local community centre, marked by a small banner and a photograph screened as evidence of the launch of the bank’s operations.

Rural branch expansion during that period may have accounted for substantial poverty reduction, largely through an increase in non-agricultural activities, which experienced higher returns than agriculture, and especially through an increase in unregistered or informal manufacturing activities. But there was a significant downside; commercial banks incurred large losses on account of subsidised interest rates and high loan losses — indicating potential longer-term damage to the credit culture.

Rural finance programmes should have substantial inputs from rural sociology as part of the training kit for rural managers. Rural Banking requires greater insight into rural sociology than banking practices as far as finance is concerned. A basic knowledge is adequate to handle these simple credit proposals. It is only in case of high-tech agriculture that technical skills and expertise are required. With a few simple tweaks, social banking can be made both viable and result-oriented. We should not commit the mistake of throwing the baby out with the bathwater.

(The writer is member, NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women)

Writer: Moin Qazi

Courtesy: The Pioneer