FAO Conference, March 2007

Rural 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.

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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

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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

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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?

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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 GRAZIE

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