Loanable funds for rural trades and businesses are in short supply. In contrast, the bank owners and businessmen in urban areas are accessing huge loans through collusions and subsequently defaulting on those. The whole credit market seems to be seized upon by a syndicate, with the government a silent observer. Rural credit has a long history in Bangladesh. It mostly evoked pains during the days of Rabindranath Tagore. He amply described the sorrows of the borrowers in his poem Dui Bigha Jomi.
Formal financial system for providing rural credit in the country began with the establishment of Agricultural Development Bank in the 1960s. It was observed in the past that access to finance from formal sources was mostly monopolised by large and medium land-owning households, big traders and fishermen. As the credit availability was tagged with collateral, the landless and marginal farmers despised taking credit from the market.
A survey conducted in the late 1970s revealed that about two-thirds of rural households obtained loans from informal sources. Most of them were collateral-constrained smaller land-owning groups. Only 14 per cent of rural households could access loans from financial institutions that made up 25 per cent of total loans received by rural households. Formal sources like public sector banks actually used to play a small role in providing loans to rural households. The recovery of loans from the financial institutions was allegedly very poor, and the transaction cost of the loans was high due to the small sizes of loans. Many financial institutions however showed fictitious records of good recovery by re-scheduling the overdue loans as current loans, and even showed profits in the books by charging interest on overdue loans.
According to critics, governmental involvement in extending agricultural credit to rural households has been a history of frustration, disappointment and wasteful endeavours. The loan recovery rate against outstanding loans averaged 22 per cent from 1998 to 2010. The annual rate of increase in disbursements averaged 17 per cent, and the annual rate of repayment averaged 12 per cent. This gap between rates of disbursement and repayment resulted in accumulation of outstanding loans. A World Bank study reports that the importance of banks and cooperatives in rural lending has declined over time, while the importance of micro-finance institutions (MFIs) has increased.
Recently some qualitative changes have been introduced in the credit delivery system, which contributed to improvements in the credit businesses targeted at farmers and small enterprises. The monitoring cell of the Central Bank (Bangladesh Bank) has been strengthened for ensuring transparency in the credit business and reducing the transaction cost for obtaining credit by borrowers. Priority is given to credit support for women in agriculture in order to increase women's participation in economic activities. Emphasis has been laid on development of marketing facilities for agricultural products for ensuring fair price. Priority has been attached to reach credit to relatively impoverished and neglected regions such as Char (shoal), Haor (marsh) and the coastal areas. The Central Bank has made it mandatory for the state-owned commercial banks as well as the private and foreign banks to allocate at least two per cent of their loan portfolio for agriculture.
Recently, the Bangladesh Bank has issued a directive to commercial banks to disburse agricultural loans openly in the presence of local representatives from unions, concerned agricultural officers, teachers and other respected persons in order to ensure transparency. Another innovative step towards financial inclusion is the opening of bank accounts by all farmers at a minimal charge of Tk 10 (12 cent), so that credit, subsidies and other government transfers could be directly deposited in the farmers' accounts. This has helped in reducing leakages in the execution of the government's agricultural subsidies and 'safety net' programmes. Bangladesh Bank has brought 13.2 million people under banking services, which includes farmers, hardcore poor, and the unemployed youth.
A review of the microfinance industry conducted by famous social scientists of the country for the 10 largest MFIs (with a membership of over 200,000) revealed the following features of the rural credit market:
n There is a high concentration in the microfinance market. Three largest MFIs, Grameen Bank, BRAC and ASA, accounted for about 70 per cent of the microfinance portfolio, and the 10 largest accounted for 87 per cent.
n The average loan balance per borrower has increased from US$71 per borrower in 2005 to US$ 115 in 2009, about 20 per cent of the per capita gross national income.
n The products include not only credit but also savings and micro-insurance. About 40 per cent of the MFIs provide insurance for various purposes, including exemption of outstanding loans when the borrower accidentally passes away, the funeral expenses, and major hazards like accidents and deaths of livestock.
n The efficiency in loan operation is very low. The cost of operation was about 14.6 per cent of the outstanding loans, compared to 17 per cent in Asia and 20 per cent at the global level.
n The average yield (income from service charge) was about 23 per cent, compared to a 27 per cent interest rate cap introduced by the Micro-credit Regulatory Authority. With a cost of loan fund of about 9.4 per cent, the cost of servicing the loan at 12 per cent, and a provision for bad debt of about 3.0 per cent, the MFIs were able to make some surplus in the credit business. The surplus is accumulated as retained earnings, which is an important source for loan funds.
n The portfolio quality is not so impressive compared to international standard. The portfolio at risk (overdue loans for over a month) was about 7.0 per cent for the top three MFIs, and about 5.0 per cent for the others.
There was a time when NGOs played a pivotal role in supplying credit, albeit in small amounts, in rural areas. However, with the passage of time, the required amounts for expanding businesses/trades have grown large even for poor households, and NGOs have failed to adequately feed the customers in changed circumstances. Thus the woes of small and poor borrowers still exist. The irony of fate is that large borrowers in urban areas default on loans but get various options to cope with the default problem, whereas regular borrowers in rural areas face shortages of funds. Time has probably come to reverse the trend.
Abdul Bayes is a former Professor of Economics at Jahangirnagar University.
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