Training session on role of non government organization and bank in providing credit to women self help group
Answers
Answer:
Significance of Establishing Linkages
with Self-Help Groups and Banks
Y.C. Nanda
1. Introduction
In most developing countries, the policies concerning rural credit were, by and large, based on certain assumptions, some of which were: commercial banks were reluctant to provide for the credit needs of the rural poor for reasons that were neither commercial nor economic; the rural poor did not have any capacity to save; they needed credit on concessionary rates of interest and relaxed terms for taking up income generating activities, more so for development works on their farms; the rural people needed external assistance for organizing themselves into groups and later close watch and regulatory measures to ensure that they work together; many of the target group borrowers would graduate after some doses of concessional credit and would start taking credit on normal terms and that informal finance did a positive developmental role and it was an evil that should be eliminated. Based on these assumptions, the policy framework which developed included setting up of credit oriented development banks and special credit programmes; generous credit guarantee schemes to induce banks to enlarge their lending operations; fixation of sectoral targets for credit dispensation; loans to rural borrowers on subsdized interest rates, easy loan terms including very low or nil downpayment, long loan maturities and long grace periods, relegation of savings as a source of funds and reliance of the rural credit system on concessionary refinace from financial institutions and international donors.
Resulting consequences of the policy framework did not contribute to self-sustained growth of the rural credit system and it also did not adequately serve the rural poor. It is well known that a part of the subsidies and concessions involved in rural credit were captured by people who were not poor and substantial number of very poor could not be reached under this dispensation. Further, the rural credit delivery system in most of the developing countries was weakened by poor credit discipline among the borrowers resulting in low recovry of dues. High operating (intermediation) costs, burden of subsidised interest rates, non-viability of operations and heavy dependence on concessionary outside funding or refinance support were some of the other constraints in the development of self-sustaining systems. Many credit programmes started with support from the State or a donor agency operated as per their dictates and were abandoned due to poor results.
The erosion in credit discipline has been a fall out of the system of 'targeted credit' where loans were often made in a rush, carried a certain political aura, the lending institutions were identified by borrowers with the Government, and relationships between the lender and borrower rarely developed. In such systems, prospective borrowers were often identified by extension workers who assisted in sanction of grants (where applicable) from the state and generally escorted them to the bank who sanctioned the loan. While the involvement of the extension agents upto this stage was visible and common, their involvement in the recovery of loans so granted was most uncommon.
2. The Core Issue
The core problem of rural finance is high transaction costs to the banks in financing a large number of small borrowers who require credit frequently and in small quantities. The same holds true of costs involved in providing saving facilities to small, scattered savers in rural areas. The rural savers and borrowers also face high transaction costs while dealing with banks due to distances, small value of financial transactions etc. In a recent study [unpublished] in India, the transaction cost to a small rural borrower raising a loan from a commercial bank under a poverty alleviation programme was placed at 24.6 %. Further, the transaction costs of operating a saving account with a bank was placed as high as 10% of the saving, on the assumption of only one transaction per month.