 |
|
|
|
Profitability of credit institutions which is a prerequisite for sustainability, depends on positive interest rates to cover various levels of risks for different models, high loan recoveries, competitive lending costs and adequate profit margins. In 1991-92, average loan recoveries in Bangladesh declined from an already unsustainable 49% in 1980-81 to a dismal 16%. Likewise, an analysis of the portfolio of a major rural bank, the Bangladesh Krishi Bank (BKB) revealed, in 1984-85, a net profit margin of only 0.4%.
Poor repayment of loans was primarily due to poor credit management in a context of political interference and not to the inability of farmers to repay. The demonstration effect of loan defaults is considerable among rural borrowers. Such situations damage banks and ultimately affect the very same target groups, which the government is trying to help.
There is a trade-off between credit accessibility and viability. Adequate margins are necessary to cover risk, transaction and social intermediation (e.g. NGOs) costs. High supervision costs on numerous small loans deter banks from pursuing rural lending. Hence all costs must be precisely quantified and charged to borrowers. Any grant assistance should be temporary to avoid leakages and inefficiencies.
In contrast, the better recovery performance of credit programmes targeted to the poor does enhance the comparative viability of these schemes. Nevertheless, it should be fully recognised that stabilising targeted credit programmes may take time and that some of the initial costs have to be met.
Effective measures for enhancing the sustainability of financial services include:
At Banks Level
Collecting
adequate information on lending costs (direct and indirect) and defining
various modalities for risk coverage, accordingly.
Fixing the interest rate to cover cost of funds including administrative cost and moving progressively towards market determined interest rates.
Letting borrowers bear the full efficiency cost of credit delivery excluding social intermediation costs.
Letting participating banks (PB) contribute their own funds to augment donor aided funds for rural credit to foster participation and inculcate a spirit of ownership;
Developing a simplified banking plan, not subject to unilateral interventions once adopted.
Establishing Revolving Funds and Loan Guarantee Funds to help PBs continue lending to target groups.
Providing incentive to borrowers for timely repayment.
Enhancing beneficiaries ownership by increasing their participation in project management through training, exchange of visits and participatory monitoring, and emphasising skill training.
At Farmers Level
Responding to beneficiaries demands for goods and services (i.e. demand driven) and linking beneficiaries to input delivery service institutions in the project areas (credit, extension service).
Promoting and mobilising savings which is essential for group cohesion and peer pressure and for continuation of income generating activities (IGAs) that are competitive in the market.
Encouraging beneficiaries to build up reserve funds.
Generating and disseminating technical packages specific to target groups.
Basing criteria to involve NGO in government projects on sustainability, accountability and transparency.
Bangladesh Country Portfolio Evaluation Report No. 0540-BD, October 1994
