Nepal: Production Credit for Rural Women
The Project is executed by the Women Development Division (WDD) of MLD and is implemented through a corps of Women Development Officers and Workers (WWs). Credit is channelled by Nepal Rastra Central Bank (NRB) through three participating banks: Agricultural Development Bank (ADBN), Rastriya Banijya Bank (RBB) and Nepal Bank (NBL).
The PCRW programme was conceived as a pilot project in mid-1982, and launched in 24 districts. The Project, as designed, covers 37 of the 75 districts in Nepal, 24 of which are co-financed by UNICEF on a parallel basis. The Project extends to all ecological zones and all five administrative regions. Six of the 13 districts funded entirely by IFAD are located in the Far Western Region of Nepal.
The target group comprises some 16 000 rural women below the poverty line. Per capita income was estimated for half of all rural households at below NRs 1 970 (USD 91 in 1988), which is the poverty threshold. Targeted categories comprise inter alia: landless households, female-headed households and disadvantaged women belonging to weak ethnic and/or social groups and small farmer households.
The Project would: (i) increase incomes of poor rural women, thereby enhancing their status in society; and (ii) improve the welfare of their families.
The Project has five components: (i) community development programme (CD); (ii) credit for income-generating activities; (iii) support to WDD to establish a more efficient organisational structure, especially regional offices to provide technical inputs and marketing support to field staff; (iv) training of WDOs in group formation and curriculum development; and (v) support for the M&E Unit within WDD.
At full development, targeted rural women would earn significantly higher incomes from livestock, crop production, non-farm enterprises, and irrigation. The number of people benefitting from community development activities would be even higher. In addition, the Project would seek to: (i) institutionalize linkages between national institutions, district administrative units and the community; (ii) improve linkages between rural women, extension staff and banks; (iii) improve self-reliance and self-esteem of rural women; and (iv) generate social benefits such as better health and nutrition.
Three important assumptions underlying design were: first, the overall situation of poor rural women is best advanced through a gender-directed project, with female extension officers providing services to rural women; second, the empowerment of rural women is best achieved if linked to ultimate credit provision for an economic activity; and third, the provision of WDD services in social mobilisation can become a bridge towards reaching sustainable provision of financial services by regular commercial banks.
The IE Mission visited Nepal between November 20 and December 14, 1994. A smaller team of the original mission reassembled in Kathmandu on 10 January 1995 for ten days to complete the field phase of the evaluation.
The Mission has analyzed a large set of data that relates to processes used by the Project and impact. It was preceded by a rapid diagnostic socio-economic survey (IES), funded by IFAD OE, conducted in Ghorka and Kapilvastu districts in May 1994 (Vol. II). This survey covered 81 project beneficiaries, who were members of 24 PCRW groups in 6 communities; and 11 WDD staff. The actual mission administered prepared questionnaires to the Project beneficiaries, bank branch office staff, and WDD district level staff. The mission split into two teams, which together visited eight sites and interviewed 35 groups. Eight bank branch offices were visited: three from the Nepal Bank Limited, three from the Rastriya Banijya Bank (RBB), and one each from the Agricultural Development Bank of Nepal (ADBN) and the Grameen Bank in Biratnager.
The IE has drawn upon also two useful impact studies conducted in 1994/95. The first, funded by OPS, purposely selected beneficiaries in the Far Western Development Region, in Dhading and Kavre districts. The second study, undertaken by the Benefit Monitoring Evaluation (BME) Unit of WDD reached OE in August 1995. It covered some 220 beneficiaries in 15 districts, not those visited by the IE mission.
Overall, the Project has been reasonably well implemented in spite of initial delays, a period of much political and institutional change: it stands out well in comparison with the other priority sub-sector lending programmes in Nepal. The WDD under the MLD within its limited sphere of control has many reasons to be proud of achievements. Admittedly, the WDD has been able to exercise very limited influence through the Nepal Rastra Bank on the implementation policies, procedures and incentive structures of the three participating commercial banks; moreover, mere reliance on the Project coordination mechanisms could hardly secure the necessary extension support from structurally weak line agencies.
Organisation and management
The Project's executing agency at inception was the Women's Development Section (WDS), established in 1980 within the Planning, Integrated and Women in Development Division of the Ministry of Panchayat and Local Government (MPLG). The WDS of the MPLG was upgraded in 1990 to the status of the Women's Development Division (WDD) of the MPLG; the name of the latter subsequently changed to Ministry of Local Development (MLD).
The rationale for well designed community development activities is strong. Barriers of poorer rural women are formidable, reflected in low literacy, community gender bias, caste, ethnic divisions and difficult physical terrain. It stands to reason that community development in relative terms should represent a significant proportion of total spending. Recent data for five districts showed that whilst administrative overhead represented 46% of total cost at the district level, community development accounted for not less than 38%; the remainder was split fairly evenly between credit and non-credit related training. True, community development becomes more sustainable if firmly linked to NGOs and local groupings. But, it is neither realistic, nor desirable in the medium term to expect community development to be handled exclusively by local NGOs. The capacity is not yet present for contracting out on a large scale community development services.
It remains that the penetration of the Project across rural areas has been slower than desired. Fewer PCRW sites have been developed than targeted: 88 against the SAR target of 125, or 68%. But in the sites developed, much progress has been made under community development, some of it unreported. Appraisal targets were exceeded with a vast margin for child care centers (358%), drinking water schemes (684%) and toilets (1 320%). Reported performance was not in line with targets in the case of smokeless stoves and water grinding mills; oddly, none of the planned 129 trails and bridges have been built.
The attainment of quantitative targets for disbursement is not a sufficient condition for successful credit operation. Nevertheless, much progress has been made towards reaching quantitative targets related to credit. Not less than some 18 200 women had obtained a first credit line by November 1994 and this represents not less than 88% of the total SAR target. Disbursements for services, agriculture and livestock reached 353%, 161%, and 112% of appraisal targets, respectively. Loan disbursements for cottage industries, in contrast, only reached 55% of targets.
Nepal Rastra Bank annual disbursements for credit almost doubled from a mean of USD 203 000 for the period 1988/89 through 1991/92, to USD 371 000 for 1993/94; and reached USD 303 000 for 1993/94. Delays have occurred in forwarding and processing withdrawal applications, but total cumulative reimbursements by mid-July 1994 were almost in line with the appraisal target.
In purely quantitative terms, training has performed reasonably well; 32 650 beneficiaries have been trained which represents 75% of the SAR target. Staff have been exposed to 1 780 training modules which represents 65% of the SAR target. Quickly disbursing items were study tours and bank staff training, 273% and 164% attainment of targets, respectively.
Overall impact of the project
The dominant message that emerges is that the Project, in spite of a difficult external environment has accessed the beneficiaries with planned initial services. It has had, and is having, an important effect in two vital areas: (i) the empowerment of poorer rural women; (ii) initial credit uptake and asset formation. Profitability of funded enterprises has suffered especially for small ruminants (goats), but is commonly higher for services and micro-enterprises. Insufficient data are available to gauge the impact of credit for crop production, but many cash or high value crops are reported with high returns. Irrigation is an area where the control of males or husbands dominate that of women; relatively few successful irrigation enterprises are reported with full women participation.
Targeting of beneficiaries has been reasonably successful, but modalities need to be improved. Of those reached, disadvantaged castes or ethnic groups represent 21%, female headed households 16%, and landless households (6%). The remainder, or 57%, represent the women of "regular" low income households. Two thirds of beneficiaries are illiterate. A more cost effective targeting is justified, not least to ensure service provision to poorer female headed households.
The poverty is more accentuated in the Hills than in the Terai and illiteracy is also higher in the former area. The frequency of seasonal migration is higher in the Hills (31%) than in the Terai (12%); migration increases with scarcer agro-economic potential, i.e. in the western development regions. When husbands are absent, their wives become de facto heads of households, and have to assume higher labour loads.
Empowerment of rural women
Rural women interviewed across rural districts stated that they have been empowered to organise themselves, participate, and meet with other women outside of their homes. Women: (i) are regarded as successful and more knowledgeable by their husbands, families, neighbours and communities; (ii) access more easily extension services and engage in problem solving; and (iii) have greater independence in being able to earn cash through the use and control of credit.
After joining the PCRW programme, almost three fourths of beneficiaries interviewed by the BME study report a positive trend in asset formation; 23% reported no change and 4% a deterioration in assets. The response pattern was roughly similar for the Terai and the Hills. The households with constant or deteriorating assets explained that this was due to livestock mortality, natural disasters and floods.
The self evaluation of beneficiaries may lead to an upward bias in the estimation of material benefits that do arise merely from the Project. Nor do the recordings provide a precise relationship between benefits and costs. Yet, the perceptions offered as to asset creation suggest a respectable impact. A common exception is financing of goats.
Profitability of enterprises:
Interviews with beneficiaries in Ilam and Jhapa suggest that goat raising has yielded few rewards. Mortality rates found were as high as 30% (Annex 3). Nearly all the women interviewed reported the death of at least one goat. In both districts, the mortality rates for goats were much higher than for cattle. Women dealing with livestock were asked which animal was most prone to diseases. All rated goats as the most susceptible: then came pigs, buffaloes, and cows. All interviewed groups that had raised goats and which took up second loans shifted out of goat rearing.
The estimated enterprise budgets for Jhapa suggest that with a mortality of 30%, the households may break even financially with the livestock insurance but that there is no compensation for on-farm labour inputs.
Services and cottage industry
Profitability of micro-enterprises, cottage industries and services is commonly superior to that of livestock. This is significant since the trend in comparative advantage in production is definitely in favour of off-farm earnings because of rising land pressure. Off-farm employment is important both in the Hills and Terai, but is of longer duration in the Hills. Moreover, food security is increasingly associated with off-farm employment rather than with ownership of land. For instance, all landless members interviewed in Kapilvastu were engaged in economic activities with relatively stable streams of income, e.g. shopkeeping and retailing (IES).
Credit recovery according to the recent OPS report was higher for cottage industry (47%) and services (39%) compared with that of livestock, (34%). These aggregate data must be used with caution. But the ranking provided of the degree of recovery is reasonably consistent with that obtained from site level data. The latter are normally more reliable and they suggest that the profitability of micro-enterprises, cottage industries and services is generally superior to that of livestock. The IES, for Gorkha and Kapilvastu, found a 518 recovery among eight interviewed members taking credit for micro-enterprises, as compared to an average repayment rate of 65% for the 66 surveyed beneficiaries with livestock loans.
Sustainability of groups
About 40% of the Project beneficiaries sampled in Gorkha, Kapilvastu, Jhapa and Ilam districts drop out, or become inactive. Beneficiaries usually dropped out of the programme after the first loan cycle, which is one to five years for services and industry; one year or less for crops; about three years for goats; and three to five years for larger ruminants.
Groups become inactive for several reasons: (i) the group composition was not appropriate in terms of socio-economic differentiation, caste and ethnic parameters; (ii) beneficiaries did not agree to norms for group operations because of internal misunderstanding; (iii) the group leader was passive; (iv) the enterprise undertaken by women failed inter alia because of crop failure, or livestock mortality; and (v) the loan was not utilized for the stated purpose.
Groups created after 1990, are less active and sustainable than those that were created previously. This finding is consistent with relatively low uptake of repeat loans in many sites, and falling credit recovery rates.
Uptake of repeat loans
About 10% of all borrowers (female members of PCRW groups) had obtained a follow-on loan (IES). The IES in Kapilvastu and Gorkha found that, on the average, only 10% of the group members had taken a second loan. Similar findings were obtained by the UNDP/OPS, in the FWDR region (Bajhang and Kanchanpur).
Interviewed groups in Mustang, Syangja, Jhapa and Ilam districts had taken follow-on loans, often sequentially larger ones. In Mustang district (Marpha), one out of nine groups interviewed, or 11%, had taken follow-on loans. In Syangja (Waling and Galyang sites), two out of twelve interviewed groups (16%) had follow-on loans. In Jhapa district, 18 out of 215 groups were found to have taken follow-on loans; this represents 8% of the total number groups. In Ilam, not less than 26 of 68 groups, or 38% had taken follow-on loans, primarily for ginger and potatoes.
The OPS survey sought out the two districts of Kavre and Dhading, where follow-on loans were particularly high; i.e. a purposive selection was used. On average, 32% of eligible borrowers in the survey sites had taken subsequent loans. Eligible borrowers are defined as those coming from groups without outstanding loans. Of the multi-cycle borrowers, an average of 88% had taken progressively larger loans.
The BME survey, on the other hand, suggests that not less than 39% of the women had taken subsequent loans. The uptake of subsequent loans varied widely across development regions. The BME preliminary survey data indicated that the FWDR had the smallest percentage of women taking second and third loans (20%).
A proper analysis of credit recovery in PCRW programme is complicated by the varying definitions used, and by conflicting data. The repayment rate on PCRW loans for the 37 IFAD-supported districts from the start of the programme up to June-July 1994 was recorded at 68% (In this document, the recovery rate is defined as the repayment amount for the given year, as a percentage of the total due for this year, i.e. the repayment plus the overdue remaining at the end of this year). This is an improvement compared to the cumulative repayment performance of 62% up to June-July 1993.
The cumulative repayment rate, however, hides the deteriorating repayment performance in 1993/94. The improvement in the cumulative repayment performance resulted from the collection of past due loans. The overall repayment rate during 1993/94 in the 37 IFAD-supported districts was as low as 38%. The same estimate is obtained for end of 1994, from the data presented in the most recent OPS Supervision Report (dated April 1995).
The low or falling repayment rate has become the foremost constraint against successful continuation and replication of the programme. A low repayment rate is linked to increased pressures for rapid group formation and higher disbursement rates. But several issues are related and combine to jeopardize the PCRW Programme.
Properly designed self-help community development activities, in which the target group participates, generate the preconditions for the creation of cohesive and sustainable groupings. For this reason, three areas need attention. First, the original vision that community development has a merit on its own, and generates the preconditions for uptake of group based productive credit has fallen by the wayside. The efforts to mobilise women through community development and to prepare them for the uptake of credit in a group context have not remained in line with expectations. Community development efforts have not been sufficiently well targeted in line with needs and potential. Groups increasingly have been formed directly for the uptake of credit. Second, neither the processes that drive community development, nor the outcomes are monitored. Third, in the face of widespread malnutrition of children, it is odd to find that nutritional growth monitoring is not supported and used by the Project to guide its interventions.
Insufficient screening of group membersand financial enterprises
Programme Management has not provided sufficient instruction, and permitted WWs sufficient time, for creating sustainable groups. Such groups should be self-driven by transparent performance based rewards and promises for a follow-on loans. The BME survey found a high degree of central direction from the WDD/WDOs. Members' freedom to choose group members and type of credit funded enterprises was severely restricted.
The joint liability concept remains the core principle for the PCRW credit group formation. But the present command system does not allow beneficiaries sufficient time to screen each other as "potential credit risks". The best practice for such screening begins with community related training and self help activities and proceeds through regular meetings and savings contributions. Normally, a group becomes cohesive when the individuals with the lowest risk of default recognize their mutual interest in cooperating. Conversely, through a selection or exclusion process, individuals recognized as those with the highest risks are forced to group together. But with rapid coerced group establishment, members have little or no time neither for selecting their peers, nor for skills development and final selection of enterprises to be funded by credit. Consequently, the joint liability concept has not reduced in line with expectation risks of credit default.
Losing experienced cadres
Several explanations can be found for the present type of command systems or central direction. Such direction reflects an overly centralised administrative structure but also inexperienced staff. The Project has been losing precisely the cadres of the pioneer WDOs that started-up the programme and have relevant field experiences. This age bar issue, that staff in excess of 35 years cannot be maintained or hired, remains an unresolved issue. As an interim measure, such experienced cadres could be assisted to create independent NGOs, which then could be contracted by PCRW to deliver required services.
Human resource development
The training function is not up to par, neither for overall curriculum development, nor for staff in-service training, and training of beneficiaries. A relevant overall conceptual framework for human resource development is not available, nor have field staff been exposed to state of the art technologies for participatory need assessments and rapid diagnostic techniques. Beneficiaries commonly do not receive training prior to credit uptake, and quality of subsequent training is not in line with expectations. For instance, land less women engaged in off farm enterprises in Kapilvastu and Gorkha reported that they were not particularly interested in the present training programmes because of irrelevant course content and ill-timed sessions.
Insufficient incentives of bank branches
The WDD central command system discourages participation and has been compounded by similar tendencies within the participating commercial banks that emanate from their head offices. The bank branch office staff are not well informed; they are not aware of the relatively high profit margins of successively higher lending to the PCRW groups: the smooth progression towards uptake of repeat loans is blocked. The branch offices are not well supported to provide follow-on loans to the PCRW target group in line with actual profit margins on PCRW lending, risk and performance in credit recovery.
Limited profits on PCRW lending
The possibility of PCRW progressing towards sustainability through an increasing volume of repeat loans is impaired because of these systemic disincentives. With a limited volume of small subsidized loans, transaction costs have remained high and profit margins low. The PCRW needs to intensify its efforts to mobilize and enrol small borrowers to reach the banks' thresholds for critical mass, at which they become attractive business prospects. But action is also required that addresses the structural issues in the rural banking of government owned banks.
Limited profitability in rural banking
Programmes of the PCRW type that embody social intermediation costs, that remain external to the commercial bank rural branch offices, become more costly to internalize, the lower is the profitability of these branches. Three of the four bank branches studied displayed negative profit margins on their regular lending (Chapter VI, Table 6.5). In fact, the higher are the trans-action costs on the regular lending, and/or the larger are the losses on this lending, the greater are the subsidies required for social inter-mediation.
On the positive side, the inherent rational for the PCRW programme remains. First, there is ample evidence for that the process of empowering poor rural women can become very successful, if linked to ultimate credit provision for an economic activity. Second, the original Project rationale for targeting support and credit by gender, or solely to rural women, remains a valid proposition for the foreseeable future, because: (i) the prevailing high illiteracy among poor women in Nepal; (ii) high malnutrition rates of children; (iii) remaining pervasive cultural barriers that reduce women's control over resources within the households and impede their active participation in economic activities; and (iv) the presence of a motivated cadre of women extension staff within the WDD. Many interviewed women in Syangja and Mustang confirmed their preference for continued gender targeting of credit services.
But three critical issues cloud the future of the Programme: if unresolved, IFAD funding of the current credit delivery system should not continue. First, will the credit recovery rate be raised, finally be properly defined and monitored; moreover, will a policy be formulated to deal with the past stock of long overdue loans? Second, can the provision of WDD services in social mobilisation become a bridge towards reaching a critical mass of repeat loans to former PCRW clients that can be sustained by the regular lending of commercial banks? Third, can the profitability of regular commercial banking in rural areas be sufficiently improved to reduce the thresholds, which raise the costs of required social intermediation for the PCRW?
If the answers to these three questions are negative, then service and credit provision to poor rural women in Nepal must find other and different institutional vehicles. A future PCRW programme should then look quite different.
But the Grameen bank approach does not necessarily offer an overall solution to the problem of creating a viable system for providing financial services in the rural areas. There is much to be said for a pluralistic approach to credit delivery in rural areas. Support for Grameen banks in Nepal should certainly continue. On the other hand, the drawbacks of the few banks that are emerging should also be recognized: their transaction costs may be relatively high; also their customers receive a significant subsidy, once the loan is fully repaid. Moreover, the number of outlets is very limited compared to the vast number of rural bank branches across Nepal. It remains that an overhaul of the entire system of financial policies, the rules and regulation for the present Priority Sector Lending in Nepal need to be overhauled.
The Project Implementation Committee
This Committee should meet more often than a mere three times per year. It should meet at least six times a year inter alia to review progress and relate physical performance also to financial indicators such as credit recovery by district and by type of enterprise.
Decentralisation to regional level
The originally planned decentralisation of project management functions, service delivery and technical back-up should be enacted upon. The five regional offices proposed in the SAR should be established and six SMSs be posted initially (three each in livestock production and in micro-enterprise support, see below). This is essential for the vital continuous training and guidance process to district staff: for reassessing enterprise budgets, risks, relevant technology and marketing data, and to realign services based on feed back from beneficiaries. To this end, the Government is advised to first draw-up the desired future regional organisation of the WDD; the modalities for coordination with other line agencies at this level should be established. In the interim, the SMS posts recommended below should be assigned to district WDOs.
A serious staff issue threatens the performance and sustainability of the entire operation. The 35 year age limit for already hired staff to retain a WDO position, or apply for one, has inhibited maintaining, and hiring, senior and experienced women officers in WDO permanent positions. There is an urgency in resolving this issue.
Selection criteria for sites groups and beneficiaries
Site selection and expansion
The selection criteria for bank branch offices, sites, groups and beneficiaries should incorporate four elements: (i) poverty and need; (ii) agro-economic potential; (iii) performance; and (iv) availability of local women groupings/NGOs.
The Project should use a more cost effective approach in poverty alleviation. It should focus on the to medium stage adopters in a defined set of sites. The aim should be to obtain early on a critical mass of beneficiaries to ensure sustainable services, especially of credit. Early adoption is encouraged through well defined enterprises in line with the preferences of the target group. The Project then moves on to a second set of sites and so forth. The Project should not waste limited resources on the late adopters, trying to obtain from the outset a uniform high adoption pattern across households and communities. The late adopters can be still enrolled even when the Project has shifted from an intensive to an extensive phase in the given sites. The need to monitor the mobilisation specially of disadvantaged groups is crucial (Annex 4). On the other hand, women in households that are not easily, or immediately, credit worthy should be targeted for a proper complement of food aid, community development services (and food for work).
A proper needs assessment at the site/VDC level should precede the decision to expand the existing site, or select a new one. At time of site selection, the potential in terms of infrastructure, institutional framework and access is normally considered. But at present, the selection of sites does not reflects a combined assessment based on needs, potential, and performance. Preferential location of sites to areas where local women groupings are already emerging would certainly enhance the prospects for sustainability.
Screening of beneficiaries
The present system of screening female beneficiaries for programme participation based on a detailed numerative assessment of per capita income should be discarded. The methodology is excessively time consuming for already overburdened WWs; the assessments are often obsolete at the time of group formation. Given these limitations, the WWs' personal informal assessments understandably dominate in screening for eligible women.
Instead, eligibility should be assessed by using more easily obtained indicators; moreover, communities themselves should be enlisted in the screening process. In determining eligibility, four general criteria are recommended for four categories of households:
General criteria for eligibility
a) Monthly food requirements from all production and income sources have not always been met over the last three years;
b) House construction is not of cement; neither should beneficiaries at the outset possess corrugated galvanized roofing material;
c) None of the resident household members over the last three years have been employed in salaried positions for more than six months p.a.; and
d) Willingness of potential beneficiaries to contribute labour or cash for community development activities in their immediate vicinity.
Households with land:
less than 0.5 ha of high potential (irrigated) farm land owned and leased, but where weights are used that relate to productivity (and the weighted land area should not exceed 0.5 ha), i.e.:
- Irrigated low land, and upland (weight 1.0);
- Non irrigated lowland (weight 0.5);
- Non irrigated upland (weight 0.3); and
- Non cultivable (weight 0.2).
a) Landless households with resident family members with no member being salaried, (such as government employees);
b) Female-headed households with less than 0.5 ha of land, and where husband is absent for more than 6 months per year; and
c) Disadvantaged ethnic groups should receive fair attention in the targeting (WWs from the same ethnic groups need to be recruited).
The Project rightly would like to enrol also wives of ex-army personnel in its activities. Typically, many such women are willing to be leaders of other women in their communities. These persons would normally neither qualify, nor need credit, but their enrolment can contribute to strengthen the Programme concept across communities.
Interviewing for eligibility
The interviewing proceeds in three steps. First, on arrival, an up-to-date list is made up of all households in the village (if not already available); second, through interviewing a small group of representative village women (6-10), the households listed are classified into three categories: (i) those who are relatively poor, category A; (ii) those who have an average or median farm size, number of working members, physical assets, and "income" in the village, category B; and (iii) those who are even better endowed, category C. These data are recorded.
Second, after these three sub-lists are available, the households in groups A and B are screened if they comply with criteria (i) a) - c) above. Third, at the same time the households are classified by the criteria listed in category (ii) a) through d), above.
Interviewing for selection
Prior to mobilisation, at the time of presentation of the programme concept, eligible households are screened about their willingness to abide by the "ground rules". Selection finally is contingent upon willingness to contribute labour or cash for community development activities (criteria i) d), above).
Link between community development and credit
a) Revision of operational guidelines
The original, basic conceptual framework for the Project remains valid, but present practices are no longer aligned with this concept. The recent dominance of credit delivery within PCRW is not in line with the original concept. The present situation where credit too often has become the direct entry point for contact with rural women, without first creating awareness of gender roles and social mobilisation, should be discontinued.
The Operational Guidelines for project support should be revised to clearly reflect the sequencing implied in the original design. It would be useful for the PCRW programme to adopt a transparent process approach to development that meets the requirements of predominantly illiterate rural women. Such a sequence of activities begins with creating first, "awareness"; second, "empowerment" to shift attitudes away from those of "helplessness" to "engagement", and to build group cohesion and mutual support mechanisms; third, expression of preferences" for type of community activity; fourth, skills in group building and for participation in community development activities; fifth, job and or enterprise-specific skills preceding credit uptake; and sixth, awareness of requirements for skills in credit management.
b) Formulation of indicators
The entry and exit points for each intervention directed at mobilizing groups of rural women need to be defined for the purpose of process monitoring. Indicators of achievement or performance need to be fixed at each exit point. The initial point of entry should always be an assessment of the needs of the disadvantaged women in each locality: they should be solicited to identify problems, those that affect them at the community level, and those that are household specific. The former can be pursued in terms of finding joint or co-operative solutions inter alia through community level activities to reduce excess labour loads and marketing constraints. The latter, reflecting inter alia low productivity and/or high cost of informal credit and forms of socio-economic bondage, can then be more easily solved. In the latter area, for household specific activities, the required skill uptake and job training need to be defined.
c) Issue-oriented workshops
A series of issue-oriented workshops should be held for WDO trainers and central staff. These workshops should be used to redraft the operational guidelines (also for credit delivery), establish the entry and exit points for each sequence of intervention, identify the respective indicators of performance, a core MIS, and the training methodology (see below).
a) Tripartite review
A tripartite review is recommended to be undertaken with participation by the NRB, the commercial banks and the PCRW/MLD of the cost and incentive structure of the rural banking branch offices of the commercial banks. (Such a study should build upon the recently completed AsDB Financial Sector Study). Such a review will have to consider the relationship between high cost rural banking operations of commercial banks and the feasible level of PCRW costs for social intermediation. Necessary outcomes, or recommendations, of such a study are that:
i) An action plan is defined with which to set performance standards for the commercial banks and for groups participating under the Project;
ii) Present lending interest rates to final borrowers are shifted upwards from present negative rates in real terms to positive rates that generate a sufficient margin for participating branch offices; and the present interest rebate system to final borrowers should be revised, and integrated into the comprehensive system proposed below (viii);
iii) Commercial bank decision rules are revised: the incentives for lending under the PCRW programme must be passed on from commercial bank head offices to the participating branches so that the latter become profit centers;
iv) Incentives are given to branch offices and their staff as rewards for performance in outreach and cost recovery;
v) Similar rules apply for commercial banks and for the Grameen banks that also lend to the Priority Sector customers; the nominal lending rate of the Grameen banks is set at 20% but a 50% rebate is given once the credit is recovered;
vi) Credit recovery is properly defined and measured (repayment in each period as a percentage of repaid and overdue at the end of the same period); the stock of old overdue loans is dealt with; and minimum standards for credit recovery under the Project need to be set (see below and Annex 1);
vii) The NRB, the participating banks and WDD take steps to ensure accurate and timely delivery of credit recovery data; and
viii) Performance standards and rewards are set for groups according to a ladder concept: AA "fully credit worthy" groups inter alia not less than 95% recovery and exemplary savings performance; AB "credit worthy" groups inter alia not less than 85% recovery; and AC "other not credit worthy" groups (see Annex 1 to Volume I): an interest rebate is given groups and members that consistently meet the AA standards.
b) Comparison of PCRW transaction costs with commercial bank branch office profit requirements
The NRB together with the NBL, RBB and the Project should establish standard criteria for the required critical mass of second and follow-on loans that is required for a bank branch office to break even under the PCRW lending.
The question remains as to the scope of the commercial banks to assume the transaction costs associated with follow-on loans for the PCRW clientele? Indicative financial statements and balance sheets for bank branch offices should be established to demonstrate the minimal lending volumes required under given conditions as to cost of funds, risk and interest spread.
Overall PCRW and bank transaction costs should be lower for handling second, or follow-on loans after successful repayment of the initial one; moreover, with higher lending rates for successive loans at higher loan amounts, profit margins improve. Attaining, early on, a critical mass can assure sustainability of the credit window: financial sustainability of credit institutions should be aimed for at least after five to ten years; institutional and financial viability of rural credit institutions over time necessarily is more important than continued uniform parcelling out of credit and slow build-up of credit volumes.
c) Credit Ladder for Selecting Successive Enterprises
Cautious lending in relatively small amounts serves as a protection against over-financing that leads to "credit trap." A ladder should be used: after successful repayment of the first loan, borrowers progressively become eligible for further loans at increasingly larger amounts. Emphasis should also be given to portfolio diversion so as to reduce co-variance of risks. This practice is found but is not common.
d) Loan recovery
i) Control mechanisms
Adequate control mechanisms for programme management need to be created as a matter of urgency; the NRB and the PCRW need to devise an up-to-date monitoring system.
More personnel are required; at least two persons should be deployed on a full time at the NRB in the monitoring of PCRW related credit and recovery.
e) Flexibility in repayment schedules
There is a need of more flexibility in realigning repayment schedules with cash earning possibilities. Once more flexibility has been introduced, it makes sense to review the provisions for enforcing better the repayment obligations.
f) Information about contractual obligations
Group members' knowledge about their repayment obligations need to be improved. Once, a group loan is approved, the bank should have prepared a loan disbursement schedule for each borrower. Many members complained that they were not aware of their repayment obligations.
g) Improved bookkeeping and transparency
Bookkeeping should be improved at the level of the branch office, group and site. A separate ledger should be kept at each bank branch office, and for each group. Each group member should have a pass book for the recording loan transactions, repayment and savings. This will increase transparency and reduce risk of fraud. For illiterate groups, the use of visual methods of recording should be explored.
h) Pilot projects
i) Exploring loans for purchase of land by women
The feasibility should be explored on a pilot basis to provide credit to rural women for the purchase of land; to begin with, amortization schedules should be drawn-up as a test case of feasibility, given the land market (and prices) in three representative sites in two districts; one in the Terai and one in the Hills.
ii) Individual loans under hire purchase agreements
The service sector is becoming increasingly interesting; tailoring is an attractive sector; for women who have successfully completed two loan cycles, the possibility should be explored of establishing hire purchase arrangements with regional agents for say "Singer" sewing machines.
Sustainable savings behaviour
a) Savings behaviour
Three to six districts should be chosen as pilots for intensive support of savings mobilisation and the mobilisation of inter-group savings. Expansion of savings is vital, it is a crucial determinant for the emergence first of sustainable groups, and second of a rural financial system supplementing those of the regular commercial banks. But the capacity of WDD staff, and the skills in local communities, are still weak to support savings mobilisation for the purpose of pooling funds and allocating them into productive pursuits.
b) Revolving funds
The revolving funds (RFs) have not taken off and the objectives and the context of these funds should be reviewed. The WDD set up RFs in nine districts; they were set up on an experimental basis to make funds available to satisfy credit needs of members not normally met by the bank. At a minimum, bookkeeping with separate ledgers needs to be introduced.
i) Preconditions for targeting livestock credit across locations
The targeting of credit for livestock across locations needs to firmly reflect a set of minimum preconditions in view of the high prevalence of animal diseases, low productivity, high mortality, and low repayment. Important preconditions inter alia are: (i) training especially in diagnosis of small ruminant diseases, prior to the credit, as a precondition; (ii) availability and affordability of veterinary drugs, and of vaccinations; (iii) planting of fodder trees and/or crops, and/or confirmation of adequate grazing area outside of the village; and (iv) livestock insurance certificate.
i) Posting of three additional SMS in livestock development at the regional level
Firm technology support must be built into design to raise profitability of selected enterprises. Three SMSs in livestock and fodder management should be posted in three of the regions to fill the gaps between line agencies/WDOs and WWs and beneficiaries. They should stay in close touch with research institutes and other animal husbandry programmes. Until an effective regional structure has been established, in the interim, these SMSs should be located at a suitable WDO district office. They should train WWs as well as local women who could reestablish the concept of para-veterinary workers. (The latter after completed training should be given a basic veterinary kit.)
b) Cottage industry and the service sectors: Entry points
i) Site surveys
The WDOs should assist women to identify entry points for the cottage and service sectors. Site surveys are vital to explore interactions with NGOs, access to markets and other preconditions. The WWs should be trained in developing profiles of low cost cottage industry.
ii) Hiring of SMS in entrepreneurship development
Three SMS should be hired to promote entrepreneurship development for off-farm enterprises. They should be posted at the regional level, in the interim at existing WDO offices, whilst an effective decentralised regional structure can be established. They would function inter alia as trainers for the district WDOs/WWs.
c) Producer groups
The concept of the "credit group" should be transformed into the that of a "producer group", or the new group should be linked with an existing cooperative group. The potential of groups is not sufficiently exhausted. The scope for group development is enhanced when individual efforts are combined; e.g. purchases of inputs in bulk; one billy goat to serve several groups, joint marketing activity, etc.
The cooperating institution
Positive is that OPS has become actively involved in supporting "the change processes" within the Project. Moreover, its assistance is required in supporting:
a) The restructuring proposed of the financial intermediation system; in particular, it should take the responsibility for assisting in the process of finally creating an accurate and timely reporting on credit recovery and arrears;
b) the defining of criteria with which investment proposals are screened prior to credit approval;
c) the process recommended for shifting from one site to the next based on defined graduation criteria; and
d) development in the poorest districts, found in the Far Western Region, by visiting
Destructive Pressures for Accelerated Credit Provision
In the normal course of events, it is to be expected that over time pressures build-up for an accelerated provision of credit. Credit delivery, on the demand side, is driven by low or subsidized interest rates compared to alternative rates in formal and informal markets. These pressures on the demand side, met at site levels, are often compounded by those from the centre and from donors to accelerate disbursement rates. Excessive credit expansion is facilitated when accurate and verifiable information on level and trends in credit recovery rates is not available.
All too easily, the provisions in the design of rural development projects that contain credit components can be compromised. Careful preparation and build-up of group cohesion initially through community self-help and group savings then fall by the way-side. Groups which are hastily created soon fall apart after the granting of the initial credit: the joint liability provisions that should mitigate and reduce credit risk do not mature. Credit recovery drops. Project sustainability is threatened.
In contrast, active participation in community development may release women from labour constraints; training, group meetings and regular savings help them to select first peers with known risks of credit default, and second, the credit funded enterprises that they prefer. A necessary outcome for donors to accept is that with this process, overall project disbursement rates initially are lower, but that prospects for long-term impact and sustainability are greatly enhanced.
Impaired Decision Making to Improve Resource Allocation during Implementation
a) Investment and financing models are almost always obsolete
Investment models for major enterprises at the project sites are constructed at appraisal for purposes of determining the economic rate of return of the Project, but they are updated rarely if ever. Adapting the investment models to specific technological, marketing and socio-economic conditions in the project sites would have been most useful. Training in simple financial analysis should have been provided. The extension officers (WWs), the bank field officers, as well as the beneficiaries themselves would then have obtained a more realistic picture of cash flows, returns and constraints associated with micro-projects being proposed for financing.
The same lesson was derived for the IFAD Completion Evaluation of the Nepal SFDP II. Investment and financing models for typical enterprises in each site need to be drawn-up and updated at least once a year.
b) Monitoring of credit recovery
The SAR of the PCRW, similar to the one for SFDP II, neither foresaw the strong push for accelerating credit disbursement, nor did it set up control or monitoring mechanisms. At time of design, repayment rates need to be properly defined, performance criteria established, and effective reporting systems be set up. Decision rules can be defined a priori with which to take corrective action when standards are not met. But when these efforts are not undertaken at time of design, subsequent efforts to improve upon the situation remain ineffective: ultimately, the sustainability of the supported credit line is threatened. Far more attention and direction must be given to the importance of accuracy and timeliness in the financial reporting systems: detailed modalities, resources and funding need to be set out in the design documents.
Creation of technology support structures
Another lesson learned from this and other projects is the need to ensure that a proper decentralized structure for technology support and diffusion is established. Such a structure comprises specialist extension officers (subject matter specialists, SMS) located in reasonable proximity to extension workers and the target population. The SMSs operate as trainers of trainers, advise in diagnosis of constraints, financial analysis of profitability, enterprise selection and ensure link-up with applied research and veterinary institutes. In the absence of ensured provision of such decentralised technology support, profitability and sustainability of economic activities and enterprises funded under the Project remains at risk. The possibility of funding on-farm trials and experimentation supervised by such SMS should be explored. Operational mechanisms for technology support, together with funding for this purpose should be ensured at time of design.
Emphasis on institution building
Adequate financial services to the rural poor can be provided only when institutions become financially viable over the medium term. In the short run, costs of necessary mobilisation and training of staff and beneficiaries, and of outreach efforts, are high relative to loan volumes. In the medium term, under given preconditions, a delivery system for outreach of financial services can be created: when a critical mass of borrowers is reached, the credit line can become "financially viable". In practice, such graduation is rare. This situation arises, in part, because criteria have not been established for minimum benefits that translate into a critical mass of borrowers and loan volume, to be attained through a targeted outreach approach; and, in part, because necessary initial costs in extending a delivery system are not distinguished from the terms, or subsidies of the financial product (e.g. subsidized interest rates on lending that may be even negative in real terms). Moreover, if the "mother" institution and its branches" are not breaking-even on its normal operations, the entire effort in reaching financial viability may still be compromised.
The lesson learned for donors is that the building of financial systems is worthwhile, but the process is difficult and long. It is advisable to treat the building of financial systems for the poor as projects in their own right; at a minimum, distinct institution building components need to be formulated as part of future projects.