Providing rural credit in southern India: A comparison of commercial banks and cooperatives
| Author | Steve Wiggins,Ben Rogaly |
| DOI | http://doi.org/10.1002/pad.4230090210 |
| Published date | 01 April 1989 |
| Date | 01 April 1989 |
PUBLIC
ADMINISTRATION AND DEVELOPMENT, VOL. 9,215-232 (1989)
Providing rural credit in southern India:
a comparison
of
commercial banks and cooperatives
STEVE
WIGGINS AND BEN
ROGALY
University
of
Reading
SUMMARY
This paper contrasts the recent experiences of two different institutions
in
providing credit
and savings facilities in the countryside of Tamil Nadu, southern India. Ever since the late-
1960s, there has been a rising demand for credit to finance investment in agriculture. This
has been reinforced by Government policy over the last two decades, and especially since
1980, to provide credit both to priority activities, including agriculture, and to disadvantaged
rural groups. Part
of
that policy has been to encourage the commercial banks to offer
services in the countryside, alongside the previously well-developed network
of
cooperatives
offering formal rural credit.
The commercial banks have had considerable success in expanding their network of
branches, and
in
increasing bank deposits and loans in rural areas. Operating as corporate
bureaucracies, the banks have been able to expand without being crippled in the process. On
the other hand, their institutional strength has meant that Government credit policy has
been implemented cautiously.
The
agricultural credit cooperatives, no newcomers to the
countryside, have still to fulfil their long-declared function of providing short-term credit for
crop production to the majority
of
agricultural households. Loan recovery by the
cooperatives has been weak. The cooperatives have suffered partly from the internal
contradictions inherent
in
any cooperative structure imposed upon the peasantry, from
major flaws in the organizational structure
of
Tamil Nadu cooperatives, as well as from the
increasing appropiation
of
the cooperatives for party political ends.
The contrasting experiences
of
the two different institutions in providing rural credit
illustrate how policy applied through different institutions can produce quite different
outcomes. They also demonstrate how changes in the socio-political environment, neither
immediately obvious nor predictable, can critically affect policy results.
INTRODUCTION
During the
1960s
and
1970s
many governments in the Third World, often with
substantial support from aid donors, set store by rural credit policies in which loans
were offered at controlled and below market interest
for
particular purposes.
Cheap
and
targeted credit has come under sustained and vigorous attack from
observers, chiefly attached
to
the Ohio State University and the World Bank
(Adams
and
Graham
1981,
Adams
and
Vogel
1986,
Schaefer-Kehnert
and
von
Pischke
1986)
who argue that such policy weakens rural financial institutions in a
number
of
ways. Low interest rates
on
rural
loans
lead institutions
to
offer
correspondingly low rates to potential savers, thereby reducing deposits and forcing
The authors are members
of
the Department
of
Agricultural Economics
and
Management,
University
of
Reading,
PO
Box
237, Reading
RG6
2AR,
U.K.
0271-2075/89/0202 15-18$O9.00
0
1989 by John Wiley
&
Sons, Ltd.
216
S.
Wiggins and
B.
Rogaly
the institutions to rely on refinance or subsidies from the central bank to maintain
solvency. Cheap credit encourages greater demand than supply, managed usually
by administrative and political rationing. The former method drives up transaction
costs, whilst the latter leads to scant loan appraisal and/or to wilful default by
politically powerful borrowers, and hence to bad debt.
These arguments have focused attention on the viability
of
rural financial
institutions (see for example Mittendorf, 1986), especially on how self-sustaining
financial institutions might be encouraged and established. The question ‘what
interest rate?’, although still important, has been joined by the equally salient ‘what
institution?’.
Although there are a number
of
reports about apparently viable rural financial
institutions (see for example Egger, 1986), relatively little has been written about
the organizational dimensions
of
rural financial intermediation. Bottrall and
Howell’s 1980 article which sets out issues in organizing credit provision for small
farmers stands as a rare exception.
This paper looks explicitly at evidence
of
organizational dimensions
of
credit
provision, describing a case from southern India in which two different institutions
have been used to provide credit and savings facilities in rural areas: agricultural
cooperatives and commercial banks. It argues that understanding the differences in
the performance of the two financial institutions is much enhanced by an
examination
of
their nature, and particularly the incentives offered to front-line
managers in the institutions.
The argument is set out in four sections. First, the changing demand for rural
credit during the last
25
years is described, together with a brief history
of
the
main institutions involved in credit provision. Second, the commercial banks are
analysed in terms of their performance as financial institutions, their organizational
characteristics, incentives, and resultant behaviour
of
decision-makers. Third, the
cooperatives are examined in similar terms as for the commercial banks. Fourth,
conclusions are drawn.
Evidence is taken from studies carried out in the Madurai region
of
southern
Tamil Nadu State between 1984 and 1987 by researchers from the University of
Reading and the Tamil Nadu Agricultural University (see Wiggins and Copestake,
1986; Wiggins and Rajendran, 1987; Copestake, 1987, and Rogaly 1987). The
Madurai region covers five Districts around the city
of
Madurai (population about
900,000),
an area
of
some 25,000 square kilometres inhabited by more than 8
million persons. Apart from the city, the area is largely agricultural, with markedly
different zones according to rainfall, soils, irrigation systems, cropping patterns,
and population densities. Although predominantly agricultural, the countryside of
the Madurai region is well served by
a
network
of
market centres which bustle with
commerce, artisan shops, and petty services. Within the region, six Blocks out
of
the total
of
66
were selected for detailed study, each Block representing one of the
principal different agro-ecological zones.
BACKGROUND: RURAL CREDIT DEMAND AND
FINANCIAL INSTITUTIONS
Credit in the countryside
of
Tamil Nadu can be classified by four types. First, there
is consumption credit-either regular seasonal borrowing by poor households
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