Credit for the poor: RE: Banking reform

[Sanjeev Sabhlok <sabhlok@almaak.usc.edu>]

Charu's observations:
---------------------

> In dealing with any problem I believe we should consider all
> alternatives.
> 
> The problem I have with the above argument is that it implies that the
> only way we can provide fair credit to those who have been unable to get
> it so far is to have a powerful outsider (IAS officer) decide who gets
> loans and who doesn't and then we dictate to the debtor exactly how the
> money is to be spent. I agree that this approach is doomed to failure
> because the potential creditors have little stake in the success or
> failure of the venture. 

Precisely my point. The IRDP and such programs are designed to convert
money into dust, and are helping pull the country down. That is why we
must move to replace this system entirely. Point for the Manifesto,
surely. Though the recommendation to disband the IRDP program and such
programs (like SEEUY, SEEPUP, Indira Vikas Yojana or whatever these are
called - there are so many I forget) might sound as if it is a 'betrayal'
of the poor, in fact, it is not. If better alternatives are put into
place, then capital will reach those who really need it and the system
will be rid of corruption in this sector.

  The question then is, what are the alternatives?
> Well, there is the existing institution of the village money----------
  lender who charges interest rates in excess of 50%, taking land
> or gold as collateral, or who ends up enslaving his debtors.

Studies have shown the the money lender relaxes the credit constraint of
villagers in many critical cases where even the best banker (such as
Grameen bank) might not enter. These are cases of marriages, death, etc.,
in a family, basically, consumption loans. There is no alternative yet
devised to this system though this is clearly full of pitfalls.

> For farmers, more recently, there are agri-business conglomerates that
> will provide credit for purchase of their products, though experience
> shows that their objective is to lock the farmers into a cycle of debt
> that forces them to continue to use their products with increasing
> dependence. 

I am not quite aware of agri-business conglomerates in India except the
case of Pepsi in Punjab (tomato and potato growers, I think). Maybe ITC
has such activities, too. And if you call the case of sugar barons as
agri-business conglomerates, and also the case of tendu leaf pickers in
MP, then perhaps there would be many such cases of credit-giving agencies.

And then of course there is the famous Anand model of dairy farming, which
also gives loans to its members. 

Many of these cases can perhaps be promoted on grounds of efficiency. 

  I can conceive of a situation where with a small seed
> capital grants, banks are built with the money of local depositors, who
> in turn elect the officers from among themselves, rotating the office
> frequently. This system like any other is subject to subversion- the
> local landlord may try to pack the offices with his people, or corrupt
> officers may try to siphon off funds, and this is where safeguards are
> needed to ensure that the bodies that control the bank are
> representative of the interests of all participants. I see this as being
> much more preferable to have the bank be run by some high and mighty IAS
> officer who sitting in his chamber has no notion of what is important to
> the individual loan seeker because the objective is to give individuals
> a sense of control over their own fate and the motivation to take
> responsibility for it.
> 
> I would suggest (again) that 2 models worthy of study are credit unions
> in this country and the Grameen Bank of Bangla Desh.

On the Grameen bank methodology, a pretty good write up is available at:

http://www.ncf.carleton.ca/ip/community.associations/perc/peace/economics/93.94/new.credit

I believe it is successful for two primary reasons: the decision to borrow
is based on the need of the borrower, and the enforcement of the return of
money is made through a joint-agreement between five or more women.

Prof.Yunus was shocked, he says, when he first found out that about 40
women, when surveyed in a village that he went to, expressed the need for
a **total** of a princely amount of $27, or about sixty cents per woman.

On the other hand, the IRDP schemes force the DRDAs to spend an average of
Rs. 2000 of subsidy and Rs. 2000 in loan (these are very rough numbers;
must have increased by now), or a total of $100 in capital (at today's
exchange rate) is pumped into each beneficiary without reference to that
person's real aptitude and needs.

I fully support the concept of setting up Grameen banks in India. This
will, again, have to be a fully private effort. If any government funding
goes into this, then this program will fail at once because soon you will 
find an IAS officer heading the bank and a Minister attending the Board
meeting of the bank. 

I had an excellent paper on the Grameen Bank with me in India; I don't
have anything much to go by, now. But it is a worthwhile idea, and we must
explore it and detail it in the Agenda. 

Prof. Yunus was working in the USA; he went back to Bangladesh to do
'something' for the country. What he did has transformed an entire
generation of rural folk, and pumped in more than $500 million into the
right hands. The bank has been commercially viable from day one, and
interest rates have never been subsidized; just enough to support the
bank's activities. 

I don't know much about the credit union model here, but I am aware of
similar government-run programs in India, called Primary Cooperative
Societies which lend money to their members. These are manned again, by
government functionaries and are, as expected, a total disaster.
Corruption is rampant, returns of loans are almost non-existent, and
invariably, an IAS officer heads the State-level Apex Cooperative Bank,
commanding a fleet of cars, and a huge bureaucracy. 

Sanjeev