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In many rainfed agricultural conditions, the identified target group consists of poor smallholders and marginal farmers. They are poor because their land is poor, rainfall is inadequate and/or needed production infrastructure and institutions are lacking. Credit given to them will predominantly be applied to their subsistence agricultural production, as well as additional non-farm activities. However, the scope for non-farm activities is frequently limited in these areas, mainly because the necessary preconditions for their evolution (higher production, incomes and demand) seldom exist. Rain-fed crop production is also susceptible to periodic crop failures. This heightens the possibility of loan defaults, which can affect group discipline and the ability to enforce group guarantees and, in turn, undermines the viability of the groups themselves. In addition, these farmers need loans and repayments geared to their planting and harvesting cycles. It is unrealistic to expect repayments to be made from savings or other sources of incomes, in circumstances where the main activity is subsistence farming.
Where Grameen Bank-type, undirected credit has been used for subsistence agriculture, the rates of default have been relatively high, and the credit system has proved unsustainable; for example, in Nepal (166 NE).
Nevertheless, with careful and patient implementation, credit for small farmers can be successful. This was demonstrated in Bangladesh, within the Marginal and Small Farms Crop Intensification Project (194 BA) and the Smallholder Livestock Development Project (280 BA). Both projects had close and effective non-government organization (NGO) involvement for group formation and training, with close monitoring of the actual enterprises. The Country Portfolio Evaluation (CPE) for Bangladesh (para 354) identified the following reasons for success in project, 194 BA. These have wide general application:
- The NGO, Rangpur Dinajpur Rural Service (RDRS), was very experienced in group formation and took sufficient care to prepare the groups of marginal farmers to receive credit. RDRS staff ensured that groups utilized the loans for the purpose for which they were taken.
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RDRS insisted that regular deposits in a savings account must be ongoing
for at least one year by group members in one of the participating banks,
before loans would be provided.
- The Banking Plan prepared under the project was comprehensive and the necessary guidance for its implementation was provided by German Agency for Technical Cooperation (GTZ) credit experts, under the technical assistance (TA) component.
- The project provided for the hire/purchase of motorbikes for bank field personnel and also instituted an incentive scheme for bank personnel.
- The Credit Guarantee Fund (CGF), established under the project with GTZ assistance, indemnified 30% of genuine bad loans; this was an incentive for the banks to pursue lending to the rural poor.
- GTZ and RDRS, together, provided effective training in banking to branch managers and to borrowers in income-generating activities.
For such marginal and small farmers, the possible interventions to alleviate their poverty are very limited; improvements must be based on a rounded package of measures to increase productivity and food security. In this package, credit plays an important role; but because of the precariousness of the situation, it needs to be introduced with great care, if sustainability is to be achieved. If not, then the legacy of the project could be a greater debt burden.
Select any of the following related project profiles for background information: 166 NE.
