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

FINANCIAL SERVICES FOR THERURAL POOR AND WOMEN IN INDIA:

ACCESS AND SUSTAINABILITY^

VIJAY MAHAJANBASIX,

BHARTI GUPTA RAMOLAPrice Waterhouse

Abstract: This paper, based on a study commissioned by the World Bank, reviews theperformance of Indian financial institutions in providing services to the rural poorand examines the key issues facing policy makers and institutions as the countrymoves forward on financial sector reforms. The study posits two sets of causal vari-ables for institutional performance: (i) Internal Practices Attitudes (IPAs); and (ii)mechanisms for client interface that either enhance or thwart access by the rural poorand women (MEAs). Both of these variables are largely within the control of thefinancial institutions. The study sought to identify changes in these variables thatcould 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 sustainableapproaches to improved access of the rural poor to financial services will need toaddress a whole range of macro-policy issues including depoliticization, ownershipand governance in addition to regulatory issues.

BACKGROUND

Indian policy makers have had a long standing concern for enhancing the access toinstitutional 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 ofthe All India Rural Credit Survey (Gorwala Committee) which showed that insti-tutional credit accounted for only seven per cent of the borrowings of rural house-holds in 1951-52. For the bottom 30 per cent of households it was as low as fourper 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'sHuman Resources and Social Development Division (ASTHR) on behalf of the India Department'sAgricultural Division (SA2AG). Funding for the study was provided by the Japanese and Norwegiangovernments.

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

212 V. Mahajan and B. G. Ramolatiatives aimed at improving flow of credit to rural areas. These have includednationalization of commercial banks, establishment of a machinery for subsidisedfinance for targeted lending, expansion of the three-tier agricultural credit co-operative system, establishment of a new channel (regional rural banks), a focuson branch expansion, and involvement of financial institutions in planning andimplementation 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 openedafter 1969. Today, rural bank branches account for 56 per cent of the branch net-work of commercial banks, each rural branch serving an average of 3,200 house-holds. The co-operative structure with over 100,000 primary agriculturalcooperatives provides more intensive penetration. As of 31 March 1993, ruraldeposits accounted for 15 per cent of the total deposits (23 per cent of incrementaldeposits after 1969). Commercial bank outstanding credit to rural areas wasapproximately Rs 230 billion, or around 14 per cent of the total credit (with theco-operative system having an additional credit outstanding of around Rs 80 bil-lion). The overall credit-deposit (C-D) ratio for rural areas was 77.0 per cent asagainst the national C-D ratio of 57.7 per cent.^ Thus, it could be said that therural financial institutions (RFIs) comprising nationalized commercial banks(NCBs), Regional Rural Banks (RRBs) and co-operative banks together havemade 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 creditprovided by the formal sector in rural areas, the formal sector only accounts forthe tip of the iceberg of rural finance (see Figure 1). A large part of rural financialflows are transacted in the informal sector; and an even larger part appears to beunreported - and poorly understood.

Against this background, in 1991, the Government of India, driven by a balanceof payment crisis, launched a liberalization programme with financial sectorreforms as a major part of the effort. The main focus of financial sector reformshas been to restore profitability of banks and ensure adoption of prudentialnorms. However, there has been growing concern that in their quest for improvingfinancial performance, banks in India may neglect, or indeed reduce their servicesto certain segments of the population, such as the rural poor, and particularlypoor 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 ruralpoor, identify constraints to realizing the potential and develop workable

^ This number is close to the theoretical maximum as India continues to have large statutory/cashreserve requirements.

Einancial Services for the Rural Poor and Women in India 213Qovt. (4.1%)

Cooperative (25.7%) / \ Total/ \ Institutional

Commerdal Banks (55.6%)Othe OnstttutionaO (0.6%) I L ^ ^ VISIBLE

(* :B95J "iNVisiBLi^ Others (Informal) Informal

Friends & Relattves (10.0%) J " \

214 V. Mahajan and B. G. RamolaCONCEPTUAL FRAMEWORK

The study posited a conceptual framework (see Figure 2) which described a financialinstitution (FI) serving the rural poor and women, as effective if it scored high on thetwin 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 'Mechanismsthat 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 '4'(Low access, high sustainability) before social banking initiatives by the government,have moved 90 to 180 and now he largely in quadrants '3' (low access and low sus-tainability) and to some extent in quadrant '2' (low sustainability, high access). Non-government efforts similarly were found to lie primarily in quadrant '2', though someinstances of movements in the direction of sustainability were noted. On the otherhand, the usage of credit by the rural poor is high, but provided mainly from infor-mal sources (see Box 1 for details). Thus, the situation is far from satisfactory seeneither from the point of view of rural customers or the RFIs. The study findings inregard to the problems of the customers and RFIs are enumerated below.

SustainabilityHigh

nI \I I \I \\ \

Low \ \\ \\ \\ \\ \\ \

The effect of policyInKlatlves since 1969

Desired effect of policyInitiatives

HighAccess

LowFigure 2. Policy impact on institutional performance.

PROBLEMS OF CUSTOMERS

Credit from RFIs is not easily available, despite the network expansion. Alarge proportion of the borrowers surveyed had received loans linked to gov-ernment poverty alleviation programmes, such as the Integrated RuralDevelopment Programme (IRDP) in which the Government gives anupfront capital subsidy to the borrower. However, these loans have beengiven only once (sometimes twice) since these programmes were initiated inthe seventies. The only exception to this is crop loans provided by PrimaryAgricultural Cooperatives (PACs) in the better run States.

Financial Services for the Rural Poor and Women in India 215

Box 1. Production credit and Consumption credit: a mismatch of demand andsupply. Source: Price Waterhouse survey data.

In terms of current usage, the priority across different types of financial servicesamong the rural poor is as follows: consumption credit, savings, production credit,and insurance. Consumption constitutes two-thirds of the credit usage. Within con-sumption credit, three-quarters of the demand is for short-term purposes such as ill-ness 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 forthe service, in terms of interest rates (varying from 32 to 92 per cent). Productioncredit 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 sec-tor, mainly banks, but also cooperatives, at relatively low interest rates (around 12per cent nominal, or 2 per cent real).

The overall source/use pattern for annual credit usage based on an average ofcredit consumption in the last three years was as follows:

Source Use Productive Consumption Total

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

Note: Figures are percentages of total credit usage.

Transaction costs of borrowing are high. The study shows these to be in therange of 17 to 22 per cent of the loan amount for commercial bank loans. Incomputing this transaction cost, besides out-of-pocket costs, payments tomiddlemen, and the price difference of assets received as loan in kind versustheir cash price in the market were all taken into account. If, in addition, thewage loss due to time spent in getting the loan is accounted for, the transac-tion costs are even higher. The effective interest rate works out to 26 to 38per cent, depending on the loan period, if transaction costs are taken intoaccount. Thus, the transaction cost adjusted interest rate comes close to thelower range of the informal sector interest rate. However, since transactioncosts have partly ballooned because of the subsidy linked with the loans, theeffective interest rate needs to take subsidy into account. With 33 per centsubsidy, the effective interest rate varies from 3.6 to 6.5 per cent. With 50 percent subsidy, the interest rate in fact becomes negative.Transaction costs for using savings facilities are also high, if wage loss for thetime taken to go to the bank is taken into account. Based on the survey, thiscost is estimated at about 15 per cent of the average monthly savings assum-ing that the savings account is operated once a month.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

216 V. Mahajan and B. G. Ramolaexperience with their bank as good or above (on a five point scale from verybad to very good).

For households below the poverty line, consumption credit needs are in therange of two-thirds of the total credit needs. Yet no consumption credit isavailable from banks for lower income groups (although credit cards and con-sumer loans are now available to higher income borrowers). From the data, itwas inferred that between half and two-thirds of the credit from banks forproductive purposes gets diverted to other purposes (See Box 2 for details).The survey indicated the main reasons for diversion were to meet lean seasonhousehold expenses and contingencies such as illness in the family, socialobligations (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 therural credit in 1992 went to artisans and village industries. While similarstatistics are not available for women, the study of a sample of branches ofthe commercial bank showed that only 10 per cent of the borrowers werewomen (accounting for 9 per cent of loan amounts advanced). The landlessand women also have a major access disadvantage since they are unable tooffer land as a collateral.

Box 2. Utilization and repayment behaviour of rural borrowers.

Of the 600 respondents canvassed, only 12 per cent of those with outstanding bankloans were regular in their repayment. Wide-spread credit diversion, low levels ofawareness 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 whichO 16 per cent did not purchase the assetO 57 per cent bought it, but sold it off subsequentlyO 27 per cent responded that the asset died (in the case of a cattle loan) or

stopped functioning. Of those who had taken a loan,

O 92 per cent did not know the interest rateO 28 per cent did not know the repayment amountO 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.

THE PROBLEMS OF RFIS

The transaction costs of lending are high for rural loans, particularly the largemajority of small loans. In the branches surveyed, 95 per cent of all loanaccounts were below Rs 25,000, and accounted for only 22 per cent of thebanks' business.

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

Einancial Services for the Rural Poor and Women in India 217Overdues 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, thepractice of loan melas, interest and loan waivers, has only increased the habit ofnon-payment. The loan recovery percentage (calculated as the ratio of collectionsduring the period to the sum of current demand and demand in arrears) reportedby the sample branches varied between 43 and 59 per cent for priority sector^ loansand 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 toreport expected levels of collection performance. The study reveals that actual over-all 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 from1992-93 (different for large and small loans/less than Rs 25,000), in line with inter-national practice.

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

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

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

The interest rates have been kept low until recently and even now arecapped for loans up to Rs.25,000 by NCBs and RRBs. Various studies haveshown 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 percent of the average loan outstanding of a small loan. On the other hand, the averageannual administrative cost of a deposit account works out to 7.5-8 per cent of theaverage size of a savings deposit account.

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

The 'priority sector' includes sectors designated as such as per the Government's developmentagenda e.g. agriculture, small scale industry and transportation.

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

218 V. Mahajan and B. G. RamolaThe above computation of minimum ending rate does not net off various subsi-

dies received by the banks. If these subsidies were to be removed, the minimumrate of lending would be still higher. One measure of the extent of subsidies givento a financial institution is the Subsidy Dependence Index (SDI).^ The SDI couldnot 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 year1992-93 this was calculated and worked out to 201 per cent. This means that ifnothing else were charged, the on-lending rate of the RRB would have to beincreased by 201 per cent to reach break-even. The average on-lending rate duringthat period was 10.8 per cent which would have to go up to 32.5 per cent.

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

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

INTERNAL PRACTICES AND ATTITUDES

The main conclusions of the study of Internal Practices and Attitudes are as fol-lows: by far the most significant cause for increased access to financial services forthe rural poor has been macro-policy changes for the banking sector initiated bythe government over the past two decades. However, in imposing these obliga-tions on the banks, adequate attention has not been given to financial sustainabil-ity 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 fac-tors constraining performance (access and sustainability) is lack of clear definitionof the objectives vis-d-vis performance factors. This lack of clarity is manifest furtherin the inadequacy of strategic responses by the banks to the various types of lend-ing obligations (rural, priority sector, concessional, sponsored, weaker sections,etc.) mandated by government policy and the near absence of any differentiation inproducts and services offered to the rural poor or in delivery mechanisms that matchthe needs of the rural poor. There were few attempts to change systems and proce-dures 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, priorindebtedness, small loan amounts, sporadic savings, ilhteracy, remoteness, etc.).

Findings of the bankers' attitude survey showed that most banks stronglyagree with the social banking role, specifically the nationalization of banks, therequirement of lending to priority sector and weaker sections, and concessionalinterest rates for the poor. However, a majority expressed disagreement with thelinking of subsidies (under programmes such as IRDP) with bank loans. A largemajority believed that the rural poor and women are either not getting adequatecredit or not getting it for appropriate purposes. Though the bank officersappeared slightly favourably incUned towards the rural poor and women as per-

See Yaron (1992).

Financial Services for the Rural Poor and Women in India 219Table 1. Effect of internal practices and attitudes (IPAs) on institutional performance.

Characteristic Internal Practices and Attitudes Consequences

Self-concept

Attitude towardsthe rural poor

Ownership andcontrol

Operating methods

Credit delivery system sees its role assaving the rural people from theclutches of money-lenders.

The poor are seen as a 'social obliga-tion' and intrinsically unworthy ofcredit.

Commercial banks are largely gov-ernment owned.

RRBs are owned by central and stategovernment and by the sponsor bankwhich itself isgovernment owned.

Even co-operative banks, which arenominally member-owned are gov-ernment controlled in practice.

Direct dealings with all clients,no agents used. Fully manual opera-tions, no automation.

Credit is rationed out, with all theconsequences including poor qualityand corruption. Though RFIsmobilise substantial deposits fromrural savers, RFIs see themselvesmainly as purveyors of outside fundsto rural areas.

Inadequate attention toappropriate products for the poor;the quality of service, low by anystandards, is even worse for the poor.

Political and bureaucraticinterference in loan decisions.

Increased borrowers' tendency todefault, due to long history of waiverof government loans.

Over-staffing, bureaucratic function-ing and poor industrial relations.

High staff costs, yet poor customerservice and inadequate managementinformation for performance control.

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

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

BEST PRACTICES

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

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

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

220 V. Mahajan and B. G. Ramola

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

Products andservices

Method of lending

Interest rate onloans

Few products that suit rural people'sspecial needs: urgency, informality,seasonality, illiteracy, livelihooddiversity.

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

Security based lending; insistence oncollateral.

Largely one-time loans, except in thecase of crop loans.

Lower than sustainable levels: doesnot cover capital, operating and baddebt costs.

Large percentage of rural borrowerscontinue to depend on informalchannels for loans, at higher interestrates.

Poor people continue to borrow atvery high interest from money-lenders; much of the formal creditreceived is diverted to consumption.

Excludes those who are asset poor,particularly landless and women.

Borrower has no incentive to repaythe first loan.

The RRBs have mostly eroded theirequity capital due to accumulatedlosses. Cooperatives have to be con-tinuously supported with budgetaryfunds.

and financial mechanisms for enhancing access (training/counselhng and facilita-tion of group formation predominated in the first category, while 'credit plus' facili-ties and product innovations predominated the second). With rare exceptions,these mechanisms did not provide the expected results because they were usedwithout appropriate changes in the structure, systems and orientation of bank staff.

The informal sector attempts have generally used a two-tier structure, with anNGO promoting and supporting self-help groups of the rural poor, who undertakesavings 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 theSEWA Bank^, a Cooperative Bank; Sarva Jana Sewa Kosh^, a non-bankingfinance company; CDF Thrift Cooperatives^ PRADAN^ Self Help Groups (SHG)and C R E S A ' SHGS) were studied in greater depth. NABARD, the apex agricul-tural credit bank, has a pilot project for linking SHGs with banks. This project wasalso reviewed in some depth. Many of these efforts have demonstrated good per-formance in increasing access of the rural poor to financial services. But ourattempts at establishing independent cost-benefit analysis for these were not suc-cessful because we found that the costs of financial and other services accountedfor 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).' The Centre for Rural Reconstruction and Social Action (CRESA) is an NGO based in South India.

Einancial Services for the Rural Poor and Women in India 221STUDY CONCLUSIONS

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

HIERARCHY OF CONSTRAINTS

The chronically income deficit nature of the target group (54 and 67 percent were below the poverty line in the surveys in the two sites) andthe inadequacy of livelihood opportunities which would generate a livingwage 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 inadequateincome).

The erosion of the repayment ethic, particularly with respect to loans fromformal institutions (only 30 per cent of the sample bank advance accountswere regular, as per the detailed study in the first site).

Erosion of the banker-borrower relationship of mutual trust. This has been amajor negative consequence of linking up poverty alleviation programmeswith bank credit. There has been a spread of corruption in selection of bor-rowers, and sanction of loans. This has also bred a high degree of cynicismamong the bank officials about the poor as creditworthy clients (as refiectedby the bank officers' attitude survey results). This relationship would requiremending before any significant new initiatives for lending to the rural poorare launched.

The past actions of the government in the creation of multiple state-owned/sponsored channels of credit have created deep-seated patternsof thought and behaviour in the Rural Banking Sector. The rural branchesof the nationalised commercial banks, the regional rural banks and the co-operative banks cannot be reorganized or converted into more effectivefinancial institutions overnight. As the government's halting progress inthe 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 systemis attempted.

There is system-wide dependence on low-cost capital, operating subsidies andperiodic capital infusions to make up for loan losses. The commercial banksare subsidising the operations of their rural branches. According to thestudy, the subsidy amounted to 20 per cent of the reported income of thesurveyed branches. In turn, banks receive a 'subsidy' for rural lending interms 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 banks1.5 to 2.5 per cent of outstanding and they receive only part of theirclaims), and reimbursement for loans written off from the central

222 V. Mahajan and B. G. Ramolagovernment (though this has so far been a one-time event, the ARDRScheme, 1989).

The erosion of the RFI's autonomy. This arises from: (i) the political view ofbanks as an instrument of state policy; (ii) full government ownership ofbanks (which results in among other things, the self-concept of banks as'public undertakings' rather than as commercial enterprises); (iii) job secu-rity 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 ofthe ills of the public bureaucracy.

Restrictive nature of regulations concerning the operation of the banks. Theseinclude high statutory liquidity and cash reserve requirements, low interestrate spreads, particularly for priority sector lending, rural-urban branch ratiomaintenance and location licensing. All these cumulatively erode profitabil-ity and make rural bank operations non-viable.

Failure of the RFIs to adopt institutional practices and attitudes (both internaland on the customer interface) to address the requirements of the rural pooras a customer through pohcies, products, structure, systems and people. Thestudy concluded that many of the higher level constraints must be addressedbefore institutional performance (access and sustainability) can be improvedby appropriate changes in IPAs and MEAs.

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

depoliticizing of rural credit (e.g., no blanket loan waivers, amendment inco-operative laws etc.);

increasing the autonomy of RFI's professional boards, freedom to select bor-rowers, freedom in staff matters etc.);

allowing multiple private sector RFIs to come up even as existing govern-ment sector RFIs are 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 becomecustomer-oriented. This would result in behaviour appropriate for the rural poormarket, development of new products, channels and promotional methods basedon-the-ground market research and a reorientation of policies and systems in linewith this new focus on the customer.

The study team's formulation of the required (new generation) behaviour toimprove access of the rural poor in a sustainable manner can be summarized asthe Seven I's (Ingredients) of successful Microfinance Programme for the RuralPoor (Table 3).

Financial Services for the Rural Poor and Women in India 223

Table 3. The seven I's of successful microfinance programmes for the poor.

Attribute New generation behaviour

Image of the poor Not see them as beneficiaries, but as entry-level customers.Independence No political interference, such as loan waivers, no bureaucratic

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

to cover costs of funds, cost of operations, cost of loan losses, and costof equity capital.

Incentives For staff: to ensure good customer service but prudent lending. Forcustomers: to ensure deposits come in and loans are repaid on time.

Intermediation Between local savers and borrowers; and between local surpluses andnon-local financial markets.

Increased capacity Larger scale; broader scope of services to include savings,consumption and production credit, and insurance; better systemsfor MIS and internal supervision; and greater ability to deal withregulatory authorities.

Integration With social intermediation (e.g. by Self-Help Groups) and technicalassistance (e.g. by NGOs and government bodies in microenterprisepromotion).

ACKNOWLEDGEMENTS

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

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