Rural banking has come a long way from the days when bankers had their first brush with rural culture. Bankers are now financial anthropologists, and many of them are playing a missionary role in transforming rural societies. However, challenges persist. When rural banking took its baby steps, villagers were shy of loans because they always related them with moneylenders and carried bitter memories of those who had suffered at their hands. The situation today is quite the opposite. People have a savage appetite for loans, but unlike their forebears, they have lost that pristine morality which equated default of loans with the guilt of shame. Banks are piling up mountains of sour loans and governments are brushing them off with buckets of precious public money.

While the positive social and economic impacts of nationalisation were quite evident, the experiment was also an eyeopening lesson in the disaster that mindless bureaucratic programmes can become. Rural banking in India has suffered severely on account of populist measures of the State. What populist leaders wanted was that the cash spigots be turned on permanently. The most fundamental canons and nostrums of banking were thrown to the wind by votehungry politicians. Banks were saddled with mountains of sour loans whose stink leached the entire rural credit system.

The assumptions and suppositions on which nationalisation of banks was premised didn’t hold much water. Delivering development is essentially a government’s job. Bankers were just expected to be financial midwives but were finally entrusted with the task of birthing development. Instead of writing off loans, the government should funnel that money into infrastructural development and allow banks to do their job with professionalism. The new paradigm must recognise the boundaries that separate banking and the government.

The original banking concept, based on security-oriented lending, was broadened after the nationalisation of banks to a social banking concept based on purpose-oriented credit for development. This called for a shift from urban to rural-oriented lending. Social banking was conceptualised as “better the village, better the nation.” However, opening new branches in rural areas without proper planning and supervision of end use of credit, or creation of basic infrastructure facilities meant that branches remained mere flagposts. It was a make-believe revolution that was to lead to a serious financial crisis in the years to come.

The Integrated Rural Development Programme (IRDP) is a grim reminder of how mechanically trying to meet targets can undermine the integrity of a social revolution to such an extent that a counter-revolution can be set into motion. Arguably, India’s worst-ever development scheme, IRDP was intended to provide income-generating assets to the rural poor through the provision of cheap bank credit. Little support was provided for skillformation, access to inputs, markets and necessary infrastructure. In the case of cattle loans, for example, a majority of cattle owners reported that either they had sold off the animals bought with the loan or that those animals were dead. Cattle loans were financed without adequate attention to other details involved in cattle care: fodder availability, veterinary infrastructure and marketing linkages for milk among others.

Working for the poor does not mean indiscriminately thrusting money down their throats. Unfortunately, IRDP did precisely that. The programme did not attempt to ascertain whether the loan provided would lead to the creation of a viable longterm asset. Nor did it attempt to create the necessary forward and backward linkages to supply raw material or establish marketing linkages for the produce. Little information was collected on the intended beneficiary. IRDP was principally an instrument for powerful local bosses to opportunistically distribute political largesse. The abiding legacy of the programme for India’s poor has been that millions have become bank defaulters through no fault of their own.

People erroneously came to believe that the State had all the answers to their problems. Governments, international financial institutions and non-governmental organisations (NGOs) threw vast amounts of money at creditbased solutions to rural poverty, particularly in the wake of the World Bank’s 1990 initiative to put poverty reduction at the head of its development priorities. Yet, those responsible for such transfers, had ~ and in many cases continue to have ~ only the haziest grasp of the unique demands and difficulties of rural life.

An even more serious problem is the possible chilling effect of subsidies on the commercial provision of competing and offering potentially better services to the poor. Subsidising finance has severely undermined the motivation and incentive for market-driven financial firms to innovate and deliver. As in other areas of development, the use of public funds is easy to justify in the interest of improving access and thereby promoting pro-poor growth. Such subsidies, of course, need to be evaluated against the many alternative uses of the donor or scarce public funds involved, not least of which are alternative subsidies to meet education, health and other priority needs for the poor themselves. In practice, such a costbenefit calculation is rarely made. Indeed, the scale of subsidy is often unmeasured.

Most development programmes are a grim reminder of how mechanically trying to meet targets can completely undermine the integrity of a veritable economic and social revolution to such an extent that a counter-revolution can be set into motion. But we refuse to learn lessons, particularly because populist politicians consider it a sure way to burnish their electoral fortunes.

All these highlight how an unenlightened politician can play havoc with the financial systems. The execution of most development programmes lacked the soul of a genuine economic revolution because it was not conceived by grassroots agents but was assembled by starry-eyed mandarins, who had picked up bits and pieces about financial inclusion from pompous newfangled and half-baked ideas generated at seminars and conferences. Cheap loans, followed with periodical waivers and write-offs, have been the hobby horse of armchair experts and lazy policymakers.

This is however not to obscure the cutting-edge role public banks have played in financial inclusion. These banks have been the backbone of the socioeconomic agenda of the government. In any rural area, the role of a public bank is not confined to banking but encompasses a more holistic developmental agenda. They are the one-stop shop for all financial needs of the local rural populace, including insurance, financial literacy, remittance amongst others.

Similarly, we have to have a rural-centric bank model. The present urban-centric model has shown that it is a recipe for disaster when used in villages. Rural areas have special characteristics and local needs. We need to hire local people, need to understand local needs. The whole model has to be driven by high-grade technology and a few simple products that can be tailored to local needs. Let us hope that the wisdom gleaned from our learning is harnessed towards the right destination.

A poverty eradication programme must mop up the surplus with the elite classes. These two pre-requisites call for strong political will to implement much needed structural reforms. Besides, the Government must aim at a strategy for development of the social sector ~ the key component should be population control, universal primary education, family welfare and job creation, especially in rural areas. These and other aspects of poverty alleviation have not received much importance in our planning.

During the massive banking expansion phase in the 1980s, opening a bank branch was made to look as casual as punching a flag post. It was impossible to locate a proper structure to house the bank. The existence of a toilet or a medical centre, a police post or a primary school in a village, as a precondition for a bank branch, was simply overlooked. In several cases when the expiry of the Reserve Bank of India (RBI) licence for the opening of the bank branch approached without proper premises being identified, banks were housed in a temple or a local community centre, marked by a small banner and a photograph shown as evidence of the launch of the bank’s operations. Rural branch expansion during that period may have accounted for substantial poverty reduction, largely through an increase in non-agricultural activities, which experienced higher returns than agriculture, and especially through an increase in unregistered or informal manufacturing activities. But there was a significant downside; commercial banks incurred large losses on account of subsidised interest rates and high loan losses ~ indicating potential longerterm damage to the credit culture.

Rural finance programmes should have substantial inputs from rural sociology as part of the training kit for managers. Rural Banking requires greater insight into rural sociology than banking practices as far as finance is concerned. A basic knowledge is adequate to handle these simple credit proposals. It is only in case of high-tech agriculture that technical skills and expertise are required.

We must never ignore the time tested values of development. Development has to value people, their agency, skills and knowledge. We must put human dignity and agency at the centre of all development work. This need is especially pronounced in villages where the poor are usually conditioned to depend on outsiders to take decisions about their lives. We must motivate them to take these decisions. This will then enable them to value not just their own natural resources but also their own wisdom. Dignity is a basic need of any human being, rich or poor. We must weave it in the development discourse.