Recommendations of the Task Force on Revival of the Co-operative Credit Structure: Implementation Issues

The Task Force on Revival of Rural Co-operative Credit Institutions (Vaidyanathan Committee) submitted its final report in February 2005 and there have been a few meetings with the state governments to work out the modalities of the implementation of the report. This paper lists out the issues that are involved in implementing this ambitious financial package of Rs.15,000 crores. It first brings out the historic circumstances under which the co-operative form of organisation came into being, its peculiarities and the principles under which co-operatives operate. The paper then puts the recommendations of the committee in the framework of the principles. Basically we argue that the major issues that would affect the implementation of the recommendation stem out from how in the negotiation between the center and the states some compromises may have to be worked out and the possible implications of the compromises. The observations are based on the recent negotiations and also on the past performance of the sector. The other issues that are raised relate to the logistics of implementation, its endurance over the long run, and concludes with a discussion on the conditions under which the recommendations could effectively work.

Profit or Purpose: The Dilemma of Social Enterprises

This paper examines the literature and practice in the field of social entrepreneurship. We specifically examine the diverse organisational forms under which Social Enterprises are undertaken and the dilemma they face when these enterprises grow. The literature is ambigious on what constitutes a social enterprise. While each of the definitions talk about solving a problem that has not been hither to examined effectively either by the market or the State, the orientation of the enterprises are not very clear in the literature. We examine the three strands of enterprises that are classified as social enterprises and their organisational form. Each organisational form has its own imperatives on growth and pressures it may have to yield to in an attempt to remain relevant. Using several examples from literature, we examine these pressure points and its implication on the purpose that the organisations are striving to serve. In the process we examine as to how much the motive for profits puts pressure on the purpose of the organisation. Each of these three strands provide interesting counter examples to the economic argument of an organisational form. We finally conclude the paper by emphasising on the importance of [a] hard-coding some elements in the choice of the client group or the ‘purpose’ and [b] having a governance structure that helps the organisations to remain focussed on the ‘purpose’. We also conclude that of the three forms of enterprise, by design, it appears that the co-operative form might be the best form of incorporation for a social enterprise, subject to certain caveats.

Rural Management Education in India: A Retrospect

The paper reviews the state of rural management education in India. Using the setting up of the Institute of Rural Management Anand [IRMA] as a pivot, the paper examines the difficulties in establishing specialized management schools, the design of the curriculum and the management of the expectations of both the students who come in and the recruiters. It then identifies the problems in running rural management programmes particularly the dilemma between explicit value orientation towards the betterment of the poor and the value neutral optimization approach of conventional management education. The paper then examines the paradigm shift that has happened in the marketplace for rural managers, and concludes with some further questions on how the future of rural management education can be addressed.

Productivity of Rural Credit: A Review of Issues and Some Recent Literature

The policy intervention in agriculture has been credit driven. This is even more pronounced in the recent interventions made by the State, in doubling agricultural credit, providing subvention and putting an upper cap on interest rates for agricultural loans, the package announced for distressed farmers. We use existing literature and data to argue that the causality of agricultural output with increased doses of credit cannot be clearly established. We argue that Indian agriculture is undergoing fundamental change wherein the technology and inputs are moving out of the hands of the farmers to external suppliers. This, over a period of time may have resulted in the de-skilling of farmers and without adequate public investments in support services and without appropriate risk mitigation products has created a near-crisis in agriculture. Thus, we argue that policy interventions have to be necessarily patient and holistic. Looking specifically at the rural financial markets, using some primary data we argue that it is necessary to understand the rural financial markets from the demand side. We conclude the paper by identifying some directions in which the policy intervention could move, keeping the overall rural economy in view rather than being unifocal about agriculture.

Building Bridges Between the Poor and the Banking System: A Study of Sanghamithra Rural Financial Services

The paper is about Sanghamithra Rural Financial Services. It traces the growth of Sanghamithra from the time it was conceived till its completion of the fourth year of operations. It maps out how the strategic positioning of Sanghamithra has evolved and responded to external environment. It also traces the reasons for Sanghamithra to re-define its own role. Sanghamithra represents a unique experiment in the microfinance sector. It has important lessons on how an intermediary organisation can be structured, the impact it could have on the banking system, its own growth and sustainability. It raises issues of structuring organisations and also triggers a debate on whether the intent should be for-profit or not-for-profit. We conclude while the intent is important to choose the form of incorporation, while the nature of activities in itself does not dictate this intent and the consequent incorporation. We also discuss the issue of taxability. While there are arguments on the “charitable” nature of the operations of MFIs, we argue that these arguments are usually open to interpretation. If an institution has tax-free status as a non-negotiable part of its model, it may encounter regulatory roadblocks. This aspect is to be factored, while examining similar experiments. The paper also concludes that there is enough scope for an intermediary level organisation such as Sanghamithra to exist given the way the banking system is evolving and given the fairly inelastic nature of demand for credit vis-�-vis interest rates. It appears that access seems to be the prime concern while we deal with rural credit. However the paper recognises that this model is yet to build in a mechanism to collect “savings” of the clients. This is an issue worth pondering while structuring such intermediary organisations.

Information Asymmetry and Trust: A Framework for Studying Micro-Finance in India

The work in the area of microfinance has concentrated on the issue of transaction costs in delivering the financial services to the poor. However, the mechanisms of reducing transaction costs have been mostly in the area of building trusts within local communities and using trust as an effective surrogate for sorting the twin problems of inadequate information and high cost of transactions. The paper presents a theoretical framework to study the field of microfinance from this point of view. There has been significant literature both in Economics as well as in Behavioural Sciences in examining the role of trust in organisational settings. This paper postulates that the element could be extended to networks like self-help groups. Eventually, it tries to identify some thresholds where the concept of trust and social capital can be used as a surrogate to reduce transaction-documentation costs and when the costs become indifferent to the underlying trust in exchanges.

Microfinance and the State: Exploring areas and structures of collaboration

This paper examines the role of state in reaching out financial services to the poor in India. The current players in reaching these services include the formal banks and co-operatives. In addition, there are several voluntary efforts that are being undertaken to ensure that financial services reach the unbanked. The paper then examines the role of the state. The role of the state is seen in three segments – direct, participatory and regulatory aspects. The paper argues that the present structuring of aid to poor and to the rural areas need to be relooked. It argues under its direct role it should put in generalized aid that goes towards aspects that affect the population at large – like creating infrastructure, providing information and access to markets. On the partnerships, the paper argues that all aid aimed at reaching individuals has to be routed through partner institutions which take up assessments on a professional basis, so that the relationship built with these institutions continue much beyond the one time dispensation of aid. It argues that this would minimize patronage dispensation by parties who are not a part of the implementing agency. Based on the current scan of the players in the market that serve the poor, the paper also suggests regulatory interventions at the policy level.

The Transformation of Microfinance in India: Experiences, Options and Future

The paper looks at the growth and transformation of microfinance organisations (MFO) in India. We first, define microfinance and identify its "value attributes". Having chosen only those MFOs that have microfinance as the core, we look at the transformation experiences. To understand the transformation experiences better, we identify issues that trigger transformation viz: size, diversity of services, financial sustainability, focus and taxation. Having identified these we look at transformation experiences internationally. We examine the Bolivian, Kenyan, Bangladeshi and the Indonesian experience. We then look at the Indian experiences. We argue that the transformation experiences in India are not large in number. However, we have found that there are three forms of organisations that seem to be popular in the microfinance sector - the Non-Banking Finance Companies, the Banks - both Local Area Banks and Urban Co-operative Banks and the Co-operatives. We then argue that in the Indian case, we find that the MFO spins off from the NGO rather than the NGO transforming itself. Having examined various options, we conclude that there is no ideal or easy path for MFOs to mainstream in India. This has implications for regulatory framework. We argue that there should be regulatory changes that allow smaller MFOs to get into more complex forms as they grow organically. We also argue that NGOs should be allowed to invest in the equity of MFOs and MFO promoted banks, as is the case in Bolivia and Africa. We maintain that entry norms on capitalisation for the current forms of organisations (NBFCs, Co-ops and Banks) need not be changed to ensure only genuine MFOs make use of the legislation and not other organisations masquerading as MFOs.

Community at the Core: A Study of Sarvodaya Nano Finance Limited

The paper traces the evolution of Sarvodaya Nano Finance Limited (SNFL). At the outset we explore the background of SNFL, the motivation for the promoters to set up the organisation and how it has grown from the time it was taken over by the community trusts promoted by ASSEFA. As a part of the study, we examine the unique legal structure set up for federating the small SHGs that were widely spread out in the areas of its operation. The idea of federating the SHGs was to leverage the dispersed savings and interest earned on the initial donor resources that were made available to the SHGs at their early stages. The aggregation of these dispersed resources into SNFL enables the women SHGs to mobilise funds from commercial banks and specialised MFI lenders, for an accelerated growth of the movement. The paper examines the rationale for having this structure, its vulnerabilities and the possibilities for growth within the given structure. We argue that this is not a structure that can be replicated easily. We also argue that it cannot grow aggressively in the long run, unless some basic design changes are made. The paper also discusses the basic question on how to structure resources that are given by the donor community for the larger benefit of the poor; and when to bring in the individual stakes of the beneficiaries if one were to promote long lasting institutions. The paper also raises critical questions on governance and management. While appreciating the impressive result achieved by ASSEFA and BASIX in getting a community owned professionally managed institution into being, it also raises questions on whether there are inbuilt mechanisms of carrying forward this effectively in future – given the structuring of capital and rights of each of the constituents.