Lending to the poor, a forgotten issue?
P. Rama Mohana Rao. Businessline. Chennai: Jan 20, 2003. pg. 1
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Abstract (Document Summary)
The book looks at what it calls 'myths' about lending to the poor, and cites empirical
evidence from different parts of the world to suggest that the poor are not necessarily
bad credit risks. It makes a penetrating study of the transaction costs faced in India by
recipients of directed credit from the formal system. Making full use of his experience as
an administrator, the author has compiled a step-by-step (or should one say, hurdle by
hurdle) list of formalities to be undergone before securing a loan from the formal credit
system. He cites studies of transaction costs and shows that they are upwards of 20 per
cent of the value of the loan, which explains why moneylenders - despite their seemingly
high cost loans - in lending to the poor follows, drawing upon the experiences not only of
Grameen Bank, but also of BRI-UD in Indonesia, BancoSol in Bolivia and our own
SEWA and MYRADA. This leads up to the author's alternative model for rural credit
institutions in India. The main features of this model are: Adopt market-based interest
rates on both loans and deposits, mobilise savings extensively - savings first, loans last,
avoid subsidies and grants - rely on own funds, deposit-taking and market-borrowings,
offer a wide range of flexible financial services - including consumption loans, flexibility in
withdrawals, insurance etc, decentralise every financial decision (except policy) to the
lowest level, adopt a group-based approach, where appropriate, enrol borrowers and
depositors as owners, protect the poor against income shocks - for instance by
extending consumption loans in times of illness, unemployment or emergencies. His
model concludes by stressing the need to prevent 'credit' from becoming 'debt' and the
principle of 'putting the poorest first'.
Full Text (1009 words)
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Banks, Borrowers and Barriers: Problems of Finance Against Poverty.
Distributors: Samata Books, Chennai
Price: Rs 130 (hardbound); Rs 80 (paperback)
The strongest criticism of the post-1991 liberalisation of the financial sector in India is
that it has done nothing for the poor. Admittedly, credit for the poor has acquired a bad
name over the years, no thanks to the loan melas or to Janardhan Poojary. The strategy
of providing credit to the poor at subsidised rates impoverished the banks without
enriching the poor. So much so, that questions of access to credit for the poor are now
out of fashion in intellectual circles and barring the occasional bleat from old- fashioned
thinkers, the issue hardly ever figures in serious discussions of India's economic
development.
One of the justifications for a market-led economy and for financial liberalisation is that it
will ultimately benefit all sections of society. A key assumption underlying the "marketeconomy-promotes-welfare" theory is that there are no "missing markets". If important
markets are missing, it is a form of market failure and there is no guarantee (even in
theory) that liberalisation will be welfare-promoting. In India, the market for credit to the
poor is moribund and hence for all practical purposes a key missing market. Can a
financially viable and market-based approach be found to provide credit to the poor and
the marginalised? This is a question of fundamental importance which P. Rama Mohana
Rao attempts to address, in this book.
Rao starts with a brief but fairly comprehensive look at the literature on rural finance,
tracing its evolution from the "cheap rural credit is good for all-round development"
phase to the so- called Ohio School critique that cheap credit renders lending institutions
unviable and unsustainable and provides rent-seeking opportunities. He then touches
upon the third phase, namely the micro-finance movement exemplified by the Grameen
Bank in Bangladesh, and the recent constructive criticisms of micro- finance. This is
followed by a survey of India's policies, and formal as well as informal institutions, for
rural credit, the highlight of which is a schematic diagram illustrating the gamut of
participants and their relationships to each other. From cooperatives to chit funds,
NABARD to NGOs, every institution is covered, including the much-maligned
moneylender.
The book looks at what it calls 'myths' about lending to the poor, and cites empirical
evidence from different parts of the world to suggest that the poor are not necessarily
bad credit risks. It makes a penetrating study of the transaction costs faced in India by
recipients of directed credit from the formal system. Making full use of his experience as
an administrator, the author has compiled a step-by-step (or should one say, hurdle by
hurdle) list of formalities to be undergone before securing a loan from the formal credit
system. He cites studies of transaction costs and shows that they are upwards of 20 per
cent of the value of the loan, which explains why moneylenders - despite their seemingly
high cost loans - in lending to the poor follows, drawing upon the experiences not only of
Grameen Bank, but also of BRI-UD in Indonesia, BancoSol in Bolivia and our own
SEWA and MYRADA. This leads up to the author's alternative model for rural credit
institutions in India. The main features of this model are: Adopt market-based interest
rates on both loans and deposits, mobilise savings extensively - savings first, loans last,
avoid subsidies and grants - rely on own funds, deposit-taking and market-borrowings,
offer a wide range of flexible financial services - including consumption loans, flexibility in
withdrawals, insurance etc, decentralise every financial decision (except policy) to the
lowest level, adopt a group-based approach, where appropriate, enrol borrowers and
depositors as owners, protect the poor against income shocks - for instance by
extending consumption loans in times of illness, unemployment or emergencies. His
model concludes by stressing the need to prevent 'credit' from becoming 'debt' and the
principle of 'putting the poorest first'.
One feels the author could have devoted a little more space to discussing consumption
loans to the poor - an issue which he touches upon and rightly considers important.
There is a certain hypocrisy in the post-liberalisation Indian approach: if an urban salary
earner wants a credit card for consumption expenditure, say a holiday in Nepal,
financiers fall over themselves trying to lend to him. But poor rural folk are not supposed
to borrow for consumption, say, a daughter's wedding or the funeral of a relative.
Discussion of such needs often begins with lectures on gender sociology and the need
for scientific temper and end with sanctimonious advice to curb such 'unnecessary' and
'unproductive' spending. The formal sector still lends only for 'productive' purposes.
Small wonder that it has not broken the hold of the money-lender. The absence of credit
for 'non-productive' purposes is a proximate cause of poverty in India since it traps the
poor into high cost debt. This insight - though empirically well-established - is rarely
acted upon. Consumption loans would be risky but with an appropriately high riskweighted interest rate and drawing on the 'best practice' in recovery methods in other
countries, they need not be unviable. The book also has a few minor printing errors (for
instance, the 'features of the alternative model' make an unscheduled appearance in an
earlier chapter).
This is a book rich in insights and ideas with the occasional poetic flourish (such as an
adaptation of Tagore, which starts with "where the credit is not debt" and ends "... into
that kind of market let our new model emerge." It is well worth reading not only by
financial policy-makers but also by bankers, civil servants, economists and students of
the Indian economy. Its strength lies in the attempt to combine the hard nose of the
banker with the soft touch of the social worker and evolve a model, which is genuinely
pro-poor but is also financially viable. And, in contrast to many books for or about the
poor, it is very affordably priced.
(Views represented here are solely personal)
T.V. Somanathan