Significance of Establishing Linkages with Self-Help Groups and Banks
Y.S.Nanda, NBARD, India
2. The Core Issue
The core problem of rural finance is high transaction costs to the banks in financing a large number of small borrowers who require credit frequently and in small quantities. The same holds true of costs involved in providing saving facilities to small, scattered savers in rural areas. The rural savers and borrowers also face high transaction costs while dealing with banks due to distances, small value of financial transactions etc. In a recent study [unpublished] in India, the transaction cost to a small rural borrower raising a loan from a commercial bank under a poverty alleviation programme was placed at 24.6 %. Further, the transaction costs of operating a saving account with a bank was placed as high as 10% of the saving, on the assumption of only one transaction per month.
Besides the high transaction costs, the perception of risks in financing small borrowers who are unable to offer physical collateral, articulate their case or submit proper loan proposals, the urban orientation and the lack of flexibility in their operations are the other constraints which restrict the out reach of the formal banking system for the poor. The poor also often perceive banks as alien institutions which exist to serve the needs of "others". The physical and social distance [in stratified societies] constrain their approaches to bank branches which, for them, do not appear to be functioning with their needs in mind. Credit needs of the poor are determined in a complex socio-economic milieu where the dividing line between credit for 'consumption' and 'productive' purposes is rather blurred making it difficult to adopt the traditional banking apporach to lending. The result is that financial services of the formal banking system have remained unaccessible to majority of the poorer sections of the rural population in most developing countries and their reliance for credit is mainly on the informal credit channels. Informal channels include money lenders who operate outside the legal and policy framework of banks, market vendors, shopkeepers and others including friends and relatives. Credit in the informal system is usually available immediately, when and where required and often without collateral and lengthy documentation formalities, since the lender usually relies on personal knowledge of borrowers and their circumstances. However, interest rates are not only extermely high, but sanctions often include conditions, verbal or writtern, which are heavily loaded in favour of the lender and are sometimes carefully guised and are detrimental to the interests of borrowers. Often credit is associated with other transactions, for example, the purchase of raw material from a supplier, with deferred payment or pre-harvest sale of a crop with immediate payment.
Availability of alternative financial services could do much to improve the welfare of rural poor and their families. In most developing countries, attempts have been made to develop cooperatives by bringing together people of small means for fostering thrift and mutual help for their economic betterment. However, cooperatives have achieved only a limited success in selected pockets. On account of their large size, and the heterogeneous economic status of their members, the decision making gets invariably delegated to a small number of usually well-off and influential members. Such influential members are often also able to corner benefits at the cost of those who are poor and do not command ownerships of productive assest or influence. Besides, since their resource base is often weak, the cooperative by and large depend on resources handed down vertically from higher financing agencies. With dependence for financial assistance and the role which most governments play in their development, growth and monitoring, cooperatives are sometimes seen by people as a "government agency" and not as their own institution.
Against this background, evolving mechanisms for meeting the economic aspirations and credit needs of the rural poor in the form of self-help groups (SHGs) seem another possiblity.
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