By Moin Qazi
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 their vote blocks. This was precisely the reason why India’s post nationalization mass banking programmes degenerated into populist agendas, which financially ruined the banks. All these highlighted how unenlightened politicianas can play havoc with financial systems. The entire execution lacked the soul of a genuine economic revolution because it was not conceived by the grassroots agents but 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.
The original banking concept, based on security-oriented lending, was broadened 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 initial impetus for social banking in India came from the Report of the1951 All-India Rural Credit Survey which concluded that lack of access to commercial banks was a root cause of rural poverty (Reserve Bank of India, 1954). This resulted in the setting up of State Bank of India for initiating social banking in India. In 1969, the fourteen largest Indian commercial banks were nationalized, at which point they came under the direct control of the Indian central bank and were formally incorporated into the planning architecture of the country The point of bank nationalization was to empower the state to target financial backwardness as a means of promoting social objectives. A central aim was to reduce and equalize the average population per bank branch across Indian states.
The object of social banking was to bring home two facts and four effects.
The two facts were:
- That right from the time of Independence, the over-riding concern of development policy makers has been to find ways and means to finance the poor and reduce the burden upon them.
- Between the concern of the policy makers and the quality of the effort, however, there was a gap. The efforts made were not able to achieve the success envisaged for a variety of reasons mainly, defects in policy design, infirmities in implementation and the inability of the government of the day to desist from resorting to measures such as loan waivers.
The four consequences flowing from these facts are:
- The banking system was not able to internalize lending to the poor as a viable activity but only as a social obligation. It was something that had to be done because the authorities wanted it so. This was translated into the banking language of the day;
- Loans to the poor were part of social sector lending and not commercial lending;
- The poor were not borrowers, they were beneficiaries;
- Poor beneficiaries did not avail of loans they availed of assistance.
The politicians believe banks can bring economic revolution through rural credit, which is just like expecting a midwife to deliver a baby. In a developing country, it is not enough just to provide credit for production. Production itself must be increased with the adopting of improved technology.
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 programme, the IRDP intended providing 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 these animals were dead. Cattle loans were financed without adequate attention to other details involved in cattle care: fodder availability, veterinary infrastructure, marketing linkages for milk, etc.
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 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 rejoin the formal credit stream.
The IRDP alone accounted for 40 percent of the losses incurred by commercial banks in rural lending in India. By the end of the 1980s, great concern began to be expressed about the low capital base, low profitability, and high percentage of non-performing assets of public sector banks, whose earnings were invariably lower than their loan losses and transaction costs. They required continual refinancing and recapitalisation by apex institutions. The final nail in the coffin was the official loan waiver of 1989, which destroyed whatever semblance of credit discipline remained.
There are two basic pre-requisites of a poverty eradication programmes. Firstly, reorientation of the agricultural relations so that the ownership of land is shared by a larger section of the people. Secondly, 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 a strong political will in the national leadership to implement the much needed structural reforms. Besides, the government must aim at a strategy for the development of the social sector of which the key component should be population control, universal primary education, family welfare and job creation especially in rural areas. These and the other aspects of poverty alleviation have not given any importance so far in our planning, though we have always thought that poverty can be removed through economic development.
Rural finance programmes should have substantial inputs in rural sociology as a part of the training kit for rural managers. Rural banking requires a greater insight into rural sociology than on banking practices and as far as finance is concerned, even a basic knowledge is adequate to handle these simple transactions. A fair exposure to primary sources, like the works of Shrinivas, Beteille, Ghurye, Mandelbaum and Jodhka can provide strong academic tools for rural managers. I would recommend Robert Chamber’s Putting the Last First as the best introduction to the grammar of rural development, particularly its exposition of participatory approaches now being espoused by the World Bank.
Policy wonks have always projected the banking correspondent model of the commercial banks as a revolutionary transformation of the landscape of financial inclusion. It made a poor beginning, because initially the correspondents or BCs were inadequately trained and banks found most of the business they sourced unworthy of processing. The expectations were that they would be able to take up credit functions. Now it is clear that only larger entities with competent manpower and proper logistical support can handle the credit functions required for modern banks.
The intentions of the business correspondent may be genuinely good, but it is a fact that he is not properly remunerated for his efforts and upfront investment. Most of these BCs are financially stable and are setting up financial franchises for enlarging their local clout, as it can give them a platform for much larger agenda, be it politics or business. If we can encourage agricultural graduates to become BCs, the credit functions will be strengthened. Dairy and agriculture are specialised activities and generalised bankers have been averse to taking decisions on high value projects for that reason. Fortunately now almost all banks are recruiting in large numbers agricultural and veterinary graduates.
Rural branch expansion during that period may have accounted for substantial rural poverty reduction during the period, largely through an increase in non-agricultural activities, which experienced higher returns than in agriculture, and especially through an increase in unregistered or informal manufacturing activities. But there was a significant downside; commercial banks incurred large losses attributable to subsidized interest rates and high loan losses – suggesting potential longer term damage to the credit culture.
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 possibility of a toilet or a medical centre or 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 RBI licence for the opening of the bank branch approached without proper premises for the bank being identified, banks had to be opened in a local temple or a community centre, marked by a small banner, and a photograph screened as evidence of the launch of the bank’s operations.
Juicy numbers give musical resonance to the ears of all bosses. Numbers have been a great obsession with Indian planners in particular. Number of men & women sterilized, contraceptives circulated, wells dug, toilets constructed, villages screened for polio, TB, or malaria, children enrolled in schools, saplings planted. There is no accountability for fudged figures. In fact, the 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.
Successful rural bankers do believe in writing intricate business plans. But they also focus their energy, intelligence, and skills on creating businesses that can thrive in a challenging environment where social skills are as important as financial skills. Rural development, even if it means deployment of financial resources, has social levelling as one its overarching goals. Since you are part of a financial planet you have to work through equations honed by financial experts, and then create your own. But you cannot find all the convincing answers in spreadsheets and databases particularly when you are dealing with people in villages where formal documents and hard data are difficult to come by. Human behaviour is far too complex to be captured by mathematical models.
What is needed not just for rural banking, but for banking as a whole, is proper judgment of human attitudes. It requires an open mind that is willing to learn the dynamics of all types of societies. The biggest misconception about banking is that the people think one should have a degree in business or finance to do well in this industry. Banking is a generalist profession dealing with diverse industries.
An educational background in economics or finance may help one understand banking concepts in the beginning. But in the long run it is the person with the right mix of personal qualities and managerial skills who will rise above the rest. These include the ability to learn quickly and continuously, openness to new challenges, a disciplined professionalism, an outgoing and inquisitive nature, an analytical and systematic mind, and negotiating savvy and personal integrity.