Reserve Bank of India governor Chakravarti Rangarajan's exhortation to rural credit institutions that their lending rates should compensate operating costs is sound financial advice, which, if followed earlier, would have prevented these institutions from getting into the precarious state in which they are in at present. For too long, the emphasis in rural credit was on subsidies, as if cheap credit was all that was needed for the rural masses to prosper. The pittance provided to individual borrowers under these cheap loan schemes was not enough to make any impression on poverty. These schemes eroded instead the viability of rural banks.

Having said that, there is also a case for ensuring that rural interest rates are not so high that it is only the rural rich who can afford to borrow. Unfortunately, our rural lending institutions have been conceived by urban-based bureaucrats, whose top-down proclivities have merely transplanted commercial banks into the rural milieu. The upshot has been completely misdirected lending, often because the field officers do not even have a nodding acquaintance with agriculture, and no roots in rural society.

Also, they compare themselves with commercial bank employees, and demand wage parity. The combined effect of these tendencies is that rural banks are awash in red ink.

Bangladesh's Grameen Bank experience shows that the involvement of local people is needed in rural credit and it is decentralised, local rural credit societies which can make the maximum impact with the lowest costs.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.