world bank document · ing causes of delinquency were not maidy attributable to weather. a...

Document of

The World Bank

FOR OF'FICIAL USE ONLY

PERFORMANCE AUDIT REPORT

INDIA

NABARD CREDIT PROJECT (LOAN 2653-IN)

JUNE 29, 1993

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

ACD ACRC ARDC ARDR BDO BIRD Bank CEM DCCB ED1 FO GO1 IFPRl IRDP ISB ISEC LDB MIS MTM NABARD PACS PCR PAR RBI RRB SAA SAR SCB SEG T&V USAlD

Name of Currency: Rupee (Rs) Rate of Exchange: End of Year

Appraisal Year (1 985) USS1.00 = Rs 12.2 Intervening Years (1 986-1 990) = Rs 13.1-18.1 Completion Year (1991) = Rs 25.8

The US$ loan amOUntS in this report should be understood to mean US$ equivalents.

ABBRMATlONS AND ACRONYMS

Agricultural Credit Department Agricultural Credit Review Committee Agricultural Refinance and Development Corporation Agricultural and Rural Debt Relief Scheme Block Development Officer Bankers lnstitute of Rural Development (Lucknow) World Bank Country Economic Memorandum District Central Cooperative Bank Economic Development Institute Field Officer Government of lndia International Food Policy Research lnstitute Integrated Rural Development Programme Industries, Services and Business Institute for Social and Economic Change (Bangalore) Land Development Bank Management Information System Monthly Training Meet National Bank for Agriculture and Rural Development Primary Agricultural Cooperative Society Project Completion Report Performance Audit Report Reserve Bank of lndia Regional Rural Bank Service Area Approach Staff Appraisal Report State Cooperative Bank Seniors Expert Group (later ACRC) Training and Vislt Extension System (United States) Agency for International Development

FISCAL YEAR Government of India: April 1 - March 31 NABARD and cooperative banks: July 1 - June 30 Commercial banks: January 1 - December 31

W E I G m AND MEASURES Metric System

BORROWER Government of lndia

FOR OFFICIAL USE ONLY THE WORLD BANK

Wabhlngton, D.C. 20433 U.S.A.

Mce of Director-Qeneral Operatlonr Evaluation

June 29, 1993

MEM 9 ORS PRE$ID NT

SUBJECX Performance Audit Report on INDIA

Attached is the Performance Audit Report on INDIA - NABARD Credit Project (Loan 2653- IN) prepared by the Operations Evaluation Department.

The project is rated here as unsatisfactory, because of poor progress toward policy and institutional objectives and especially the failure to raise repayment rates. Government gives a better rating - because of the impact on production and income objectives. But at appraisal these were subordinated to the other objectives for the first time in the Indian series of nationwide rural credit projects and both the PCR and the PAR respect the new priorities.

Nevertheless the PAR finds evidence of a growing institutional maturity at NABARD, the rediscount agency, and in associated government departments. Discussions about a follow-on project are held up awaiting agreement on an agenda for reform.

Attachment

This document has a restricted distribution and may be used by reclplents only In the performance of thelr official duties. b contents may not otherwise be disdosd without World Bank authorizetlon.


INDIA

NABARD CREDIT PROJECI' (Loan 2653-IN)

TABLE OF CONTENTS

Preface ............................................................. i BasicDataSheet ...................................................... iii EvaluationSurnmary ................................................... v

I. BACKGROUND A Introduction ................................................... 1 B. Project Preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 C. Project Objectives and Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

11. IMPLEIMENTATTON EXPERIENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ID. PROJECTOUTCOME ............................................. 8

IV. FINDINGS AND ISSUES A. Developmental Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 B. Delinquency: the Collection Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 C. Delinquency: Portfolio Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 D. ARDR: Origins and Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 E ARDR: Reducing the Chronic Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 F. PilotProject ................................................... 18 G. Findings ...................................................... 19

ANNEXES 1. Additional Material on Delinquency and Default

A Remarks ...................................................... 23 B. Relationship between Delinquency and Debt Writeaff . . . . . . . . . . . . . . . . . . . 25 C. Relationship between Delinquency, Default and the Periods of Repayment . . . . 27

2 CommentsEromNABARD ........................................... 31

This document has a restricted distribution and may be used by mcipienu only in the performance of their omcial duties. Its contenu may not otherwise be disclosed without WorM Bank authorization.


INDIA

NABARD CREDIT PROJECI' (Loaa 2653-IN)

PREFACE

This is a Performance Audit Report (PAR) on the India NABARD Credit Project, involving an IBRD Loan in the amount of USS375.0 million equivalent. The objectives were to support the development of the Indian agricultural credit system and to increase farm production and incomes. The Loan was approved on February 25,1985. It was closed, fuYI disbused, on June 30,1991 after two extensions of the closing date. The last disbursement was made on March 8, 1991.

The PAR is based on the Project Completion Report (PCR) prepared by the South Asia Regional Office and the National Bank for Agriculture and Rural Development (NABARD) and submitted to the Board on June 12,1!292, the Staff Appraisal Report (SAR), the President's Report, the Loan documents, a study of project fles, and discussion with Bank staE& OED missions visited India in May and October 1991 and discussed the effectiveness of the Bank's assistance and project execution with NABARD and other relevant agencies. NABARD's kind cooperation and valuable assistance in the preparation of this report are gratefully acknowledged.

The PCR provides an exceptionally good account of the project experience, and of the performance of the Bank and the project executing authority. The PAR summarizes these sections. The PAR has a different interpretation of parts of the project record, as discussed at greater length in the final section.

Following standard OED procedures, copies of the draft were sent to Government for comment. The abbreviated and full responses h m NABARD were taken into account in the text and attached as Annex 2.


INDIA

NABARD CREDIT PROJECT (Inen 2653-IN)

BASIC DATA SHEEX

APPrala Actual or Actualas%d Expectation Current Estimate Appraisal Estlmate

Actual 101.30 158.40 55.90 53.50 5.90 375.00

Date d FlMl D M : March 8, 1991

Dated Planned

I - w m - eoatd Date Slgning Date Etfwvwms 08f26l86

06BO189 cbw2 12/31189

Actual Date

Pre-Appraisal 18.1 21.1 36.5 30.9 1W.6 Appraisal 60.1 60.1 Negotiation 2 2 20.7 229 Supervision 1.4 19.4 55.4 90.9 21.6 29.6 6.6 10.6 W . 5 Other 1.5 19.0 5.6 26.2

Type d Mlsslon

Preparation ApPd=J Supenrlslon 1

2 3 4 5 6 7 8 9 10

Completion

Date BY No. d P e m -

NABARD lBRD

1 1 1 1 1 1 1 3 4 2

IBRD 2

Mandays in Field

Speclallzatlon 5J Perform. Rating

Type af Problem g

a F = Financial Analyst, E = Economist, I = lnlgation Englneer g M = Managerial, T = Technical

Executing Agency: Natlonal Bank for Aghlture and Rural Dwelopment (NABARD)

Folluw-On Project: Preparation delved


INDIA

NABARD CREDIT PRO JECI' ( h n 2653-IN)

EVALUATION SUMMARY

Introduction

1. This was the fifth project in a series providing Bank support for India's national agricultural term credit program. The series, and the ten state-wide credit projects that preceded it, make India the largest borrower in the Bank's portfolio of rural credit, with aggregate loans and credits totaling US$2.3 billion. Until the fourth country-wide project, ARDC IV, evaluation documents had reported favorably on the production impact of this refinancing program, even though progress toward institutional reforms was limited and arrears were rising. The PCR and PAR on ARDC IV highlighted the growing volume of arrears as symptomatic of serious systemic weaknesses in India's short as well as long term credit programs. For the first time, the judgement was made that the production impact did not compensate for the institutional damage caused by the indisciplined credit expansion: a pause in both NABARD refinance and Bank lending was called for. However these reports were issued years after the NABARD Credit Project - the subject of this audit - was approved. Processing of a planned repeater loan is currently suspended. Recoveries have not improved, and disillusionment with the performance of the rural credit system is now pervasive in the Bank. The audit examined the bases for this disappointing conclusion.

Objectives

2. The NABARD operation was intended to promote several lines of action to improve credit management by both the commercial and cooperative credit banks. NABARD (National Bank

for Agriculture and Rural Development) had replaced ARDC (Agricultural Refinance and Development Corporation) in 1982, the lirst year of the fourth loan. The NABARD Credit Project was approved in 1985 for USS375 million, of which US$340 million was allocated for on-lending and the balance for a pilot credit delivery project at the district level (US$25 million), training (US$6.5 million), and a comprehensive study (USS3.5 million) designed to provide a blueprint for a new nual credit strategy and open the way for a sixth project.

3. Government shared the Bank's concern for policy and institutional reform. But it felt that the problem of delinquency was not as serious as perceived by the Bank and that most of those overdues would eventually be recovered. And it never intended institutional imperatives to override the priority it attached to increased agricultural production, food self-sufficiency, and expansion of the credit network throughout rural India. From its perspective, production and social objectives had status equal to policy and institutional reform.

Implementation Experience

4. The Bank's funds were a minor share of NABARD refinance (about nine percent in the NABARD Credit Project), and the annual volume of NABARD lending was never signifi- cantly affected by the timing of Bank disbursements. In fact for the fifth project these disbursements were scheduled according to progress toward deadlines for the study, and to progress also in strengthening the eligiiility criteria by which branch banks in both the

commercial and cooperative systems were classified for access to NABARD rediscounts. The study recommendations became available for Government review and action in early 1989. The pilot project expanded from the 3 districts of origin at the end of ARDC IV to a total of 15 districts (among 460 in the country). Addi- tional staff and vehicles for the increased pilot field activity of branch banks were either fully (cooperatives) or mostly (commercial banks) covered by Bank disbursements. The impact of the pilot can be measured by the commitment of both sets of banks to carry on the pilot's Train- ing and Visit (T&V) style innovation after Bank financing terminated at the end of 1990. The training program was strengthened, and this includes a wide network of institutions run by NABARD, by its parent agency the Reserve Bank of India (RBI), and by the participating banks themselves.

5. Progress on correcting the systemic problems was less encouraging. Collection rates did not improve beyond the plateau of about 50-55 percent where they had settled just before ARDC IV (the collection rate defined as collections over collectibles). A serious drought in 1987 explains part of that disappointment, though a politically-inspired debt waiver scheme implemented in 1990 confirmed that the underly- ing causes of delinquency were not maidy attributable to weather. A rehabilitation program for the worst cooperatives, especially for the Land Development Banb (responsible for cooperative term credit), made little headway because the states r e b e d to pay their share. A special program aimed at families below what India calls its "poverty" line (IRDP, the Integrat- ed Rural Development Program) was targeted for special administrative reforms under the project, but these were carried out with uneven success.

suggest that the appraisal projections have been reached. On the other hand, the Bank had been moving away Erom an earlier practice of itself assessing the on-farm impact of agricultural credit programs, and so it provided no independent judgement on this conclusion.

7. Government has a positive assessment of project impact. Apart from the production goal, the project continued to support Government's objective of expanding the infrastructure and volume of credit into the villages. Also, NABARD, supported by RBI, increased its influence over commercial and cooperative channels, and continued a country-wide process paralleling the pilot operation of strengthening delivery, recovery and accounting practices.

8. Any enduring benefits of those improvements have yet to be demonstrated. And there has been little progress on the main policy reforms, particularly on the autonomy of the banks and higher interest charges. Although the final report of the study team has been out for over three years, Government has been unwilling or unable to put it to work. The Bank has delayed processing the next loan until Govern- ment makes a decisive commitment to reform.

9. It is expected that the refinance program managed by NABARD continues at its present level of activity, and NABARD asserts that the high rate of arrears reflects delays and not default. According to most analyses, repayment of at least 85 percent of all dues (and extra interest) does seem likely. Government takes the position that the loss is less than is implied here and that in any case it can support that level of loss for the near future. The farm investment packages financed by the program make sense, though the returns are lower than

Results at appraisal. But together those results are not good enough. The original objectives were set

6. Production objectives are again considered at a higher level in terms of both credit manage- to have been largely met (as they were for the ment and qualit' of on-farm projects- BY those p rdous projects). NABARD'S evaluation staff measures the audit accepts the PCR's rating of carry out systematic ex-post analyses, and these the projects's sustainability as "uncertain".

NABARD disagrees, and insists that from a long-term perspective sustainability is certain.

Findings and Lessons

10. The audit also supports the PCR's evaluation that the project had an "unsatisfactory" outcome. The principal objective established at appraisal (and sanctioned in the Staff Appraisal Report and loan documents) should be the major test of performance, even though the Government can take satisfaction with progress toward other objectives. The PCR is correct in stating that the Government did not meet a number of its major 'commitments, and that the project would have been a better instrument for development if it had. However, additional information processed for the audit suggests that the NABARD system brings a greater benefit to rural development than is acknowledged in the PCR, and provides a basis for continuing improvements. The following are the lessons that summarize the discussion in Chapter IV of the text.

The Bank and Government agreed on the objectives of this project, but not on their ranking. Government rates the project a success, based on its production impact. The Bank says that Government had agreed at appraisal that that was no longer an adequate measure.

On-farm production data is too weak to support confident claims about the impact of the program. Government should work to improve that data base, with the Bank in support.

NABARD and the Bank have to get better at assessing the incidence of both delinquency and default. The collection rate as pres- ently reported by NABARD is flawed, and in any case is a poor indicator of irrecoverable debt. The estimated 50 percent collection rate is unsatisfactory, but the level of irrecoverable debt appears to be substantially smaller. It is essential that NABARD brings improvements to the accounting

system used by participating banks to report the level and age of arrears. Measures to that effect are being strengthened, and NABARD anticipates improvements in reporting.

Government should study the effects of the 1990 debt-waiver scheme on collection rates and applications for new loans. The information available at audit suggests that collections were recovering from the trauma of the waiver, but that the newly-cleared farmers had not begun to return for new loans. Both results are important lessons for India and for other country credit schemes with high arrears.

The process whereby government ministries, RBI and NABARD tried to salvage some good results out of the waiver scheme was partly successful, and evidence of the development of an institutional maturity that serves the credit system well.

The pilot project - modeled after the T&V management system - was a partial success in spreading improved practices for credit delivery. But the bankers are unlikely to adopt some of the key components in the absence of reform of policies affecting the profitability of rural banking. This will be true for any improved management system, given the highcost nature of formal rural credit.

The Government still has to mwe resolutely on policy reforms. The most important are to Limit political interference with the autonomy of the bankers, to provide adequate margins for covering the costs of their regular rural credit lines, and to cover' the welfare costs of IRDP and other povertya-ient- ed programs by other means.

The Bank, in turn, continues to have an important role in supporting the develop ment of the refinance system as well as other rural credit initiatives.


INDIA

NABARD CREDIT PROJECI' 2653-IN)

I. BACKGROUND

A. Introduction

1.1 Bank support for agricultural credit in India began in the state of Gujarat in 1970 with the first of ten credits - totaling USS320 million - to expand medium and long term lending in individual states. They were executed by state banks and the Agricultural Refinance and Development Corporation (ARDC), an autonomous rehnancing agency of the Reserve Bank of India (RBI). In 1W5 the series of individual state operations was succeeded by a series of credit operations at the national level. The Eirst four of these new operations - also exemted by ARDC - mzeived US875 million of Bank funds - all credits except for a USS190 million loan paired with a USS160 million credit for ARDC IV.

1.2 Until 1982, the Agricultural Credit Department of RBI was the main source of refinance for seasonal and other short term credit provided by the cooperative institutions, while ARDC served as the primary means of refinancing longer term lending provided by all banks. In 1982, the National Bank for Agriculture and Rural Development (NABARD) was created as another autonomous agency of RBI, to assume the refinance functions of both ACD and ARDC. NABARD was formed two months after ARDC IV became effective, and gave its name to the fifth in this series of national credit projects and the subject of this audit.

1.3 The Indian agricultural credit system is comprised of cooperative and commercial banks, each managing about half the flow of formal credit to farmers. The major commercial banks were nationalized in 1969, allowing Government to direct available lines of credit towards economic and social priorities of the national plans ("social banking"). Since then the expansion of commercial and, to a lesser extent, cooperative credit in rural areas has been phenomenal. The commercial banking sector has overtaken the cooperative sector as the primary source of agricultural term credit, and received the larger share of funds discounted by NABARD and disbursed by the Bank.

1.4 The commercial sector has two parts. the networks of the nationalized banks (plus some remaining private banks) and a system of Regional Rural Banks (RRB) established in 1975 to expand commercial banking for poorer populations in rural areas. Each of the approximately UK) RRBs (6,000 branches) is affiliated with a sponsoring commercial bank The branches of both the commercial banks and the RRBs provide long and short term loans. The cooperative credit system also has two parts: a statecontrolled set of Land Development Banlcs (LDB) and their branches, responsible for providing term credit to cooperative members, and an extensive network of individual Primary Agricultural Cooperative Societies (PACS) and their district (DCCB) and state-wide (SCB) apex agencies. The DCCB branches make individual loans, but their main business is to support the

PACS. The DCCBPACS channel is the main source of formal seasonal credit for large and small farmers in the country. There is no national apex cooperative hanky

1.5 Despite a substantial commitment of Bank funds to the state and ARDC/NABARD credit systems - reaching US$1.6 billion with NABARD I? - the Bank's influence on Government's agricultural credit policies has been limited. Bank influence may even have fallen, as the share of Bank funds in total project costs has declined. During the period of the audited project, the Bank contributed a small share of the aggregate flows of term credit handled by NABARD and the commercial and cooperative systems. For NABARD I the Bank's share was reckoned at appraisal to be seven percent of total project costs (farm investments plus technical assistance) and nine percent of NABARD's refinance of the loans of participating banks for the farm investments. Those were lower than the shares under ARDC IV - e.g. 17 percent of total costs - and much lower than the 50%+ shares under the state projects. The Bank continued to press also for improvements in the operational directives of ARDC and NABARD, and that is the area where most of the progress on the institutional side has been reported.

1.6 Given the low share of Bank funding for NABARD I, questions were raised during appraisal about NABARD's need for Bank funds and, if they were provided, whether they would only serve to aggravate the problems which went along with unbridled expansion The Bank concluded that its support was warranted in order to support institutional development. But questions were raised again toward the close of the project. Specifically, the 1988 audit of ARDC N highlighted the issue of excessive credit expansion in relation to available institutional capacity.

1.7 PCRs and PARs on the ten state credit projects and first three ARDC projects were largely favorable. The biggest shares of these operations were directed to dugwells, tubewells, pumps and other minor irrigation, on the one hand, and to tractors and other farm machinery, on the other hand. These priorities reflected Government's ovemding interest in expanding food grain production. The importance of food self-sufficiency among national objectives is one of the keys to understanding the differences that were to emerge in the 1980s between the Bank and the Government in their assessment of the NABARD operation. For the first dozen years the Bank had also emphasized the production objectives as the first order of business. Thus, the PCRs and PARs for the Eirst thirteen projects derived satisfaction from the evidence that the production objectives for both large and small scale borrowing farms were being achieved. Thus, also, OED's 1981 cluster study of nine of the state projects and the first ARDC loan called overall results "highly satisfactoryn. Although the participating banking systems, particularly the LDBs, were criticized for high costs, poor staffing, politicization, and a rising level of arrears, these institutional problems were not considered to be serious enough to offset the successes achieved in terms of India's agricultural production drive.

1.8 While interest rates were inadequate to cover transaction costs, they remained positive throughout most of the 1970s and 1980s. Thus the Indian agricultural credit projects escaped a problem (negative real interest rates) that upset Bank-Borrower relations over agricultural credit

There Is a National Cooperative Development Corporation which supports cooperatbe marketing and agro-industrlel enterprise and has been the reclplent of three other Bank loans in the agribusiness sector. NCDC Is not a bank, but channels funds to cooperatives through cooperative banks.

3 The NABARD Credrt Project Is usually referred to as NABARD I (Includlng In the PCR), antlclpatlng agreement on a successor project that Is stlll under dlscusslon.

projects in other parts of the world. The situation changed during the last part of the NABARD I period, when idat ion rates reached double digits for the first time (in those two decades) and Government refused to raise interest rates to the extent needed to compensate for the inflationary effect. In fact, it lowered some of the rates in 1987 in response to a drought. Farmer interest rates were negative by the end of the project period (they have turned positive again by the time of this report). Moreover banking margins were inadequate through most of the 1980s and the banks did not follow normal provisioning policy to cover bad and doubtful debt. The combined effect of rising costs, inadequate margins and inflation propelled the interest rate issue to the center of discussions over the next NABARD project.

B. Project Preparation

1.9 Preliminary notes on the Project Brief for "ARDC V" were circulated in January 1982, even before ARDC IV was presented to the Board. ARDC IV was expected to be completed two years later. NABARD was established in July, 1982, and preparation of the "Nabard Credit Project" started shortly thereafter. But, largely in response to deteriorating collections, supervision ratings for ARDC IV slid from 1 to 3 between October 1982 and October 1983 and the schedule for processing the follow-on project began to slip as well. A telex from a senior Bank manager visiting India in late 1983 demanded immediate reconsideration of the project proposal, asserting that the NABARD program as then performing, with the unacceptable level of arrears, was a welfare and not a credit operation.2 He said that without substantial reforms in the program, the Bank should pull out. The program had also been receiving USAID support, but that donor agency had already withdrawn.u

1.10 The staff responded to the senior manager's warning with two initiatives. First, a special Bank mission in early 1984 recommended and got approval to have NABARD start a pilot scheme for improving credit administration at the branch bank level in one district in each of three states. The pilot was to be funded from ARDC IV (but, as it worked out, NABARD funded it and no Bank resources were ever employed). Second, a retired Bank credit specialist was recalled to review the Indian agricultural credit system and the Bank's participation, and advise on a strategy for continued Bank lending. One issue he was asked to consider was whether the shift From state to national lending lines in 1975 had been premature - insofar as state control over the cooperative lending programs kept NABARD at a disadvantage in securing remedial action in at least the cooperative network. He concluded it had not. The consultant's recommendations were nevertheless restrictive - for example, that the volume of future Bank lending be small, with limited objectives . These

prescriptions were set aside to some extent as processing of NABARD I continued. The Government maintained its position that Bank support was desirable and that the rising level of arrears was worrisome but that most of the overdues would be recovered eventually by the participating banks.

1.11 The resulting dialogue led to the novel features adopted for NABARD I (next section), and the operation moved From appraisal in late 1984 to approval fourteen months later. Nevertheless,

NABARD says that 'Indian agriculture and rural sector require speclal conslderatlon by vlrtue of Its susceptible nature... [NABARD] Is the only apex lending Inklathre In the field of rural financeldwelopment. It may n d be appropriate and deslrabie to measure NABARDDs role purely on commercial Ilnes: (Annex 2, para 6).

3' Two years earlier a respected U.S. agricultural credit consultant had written a letter to USAID in whlch he suggested the agency could do more good tor the small farmers by dropping Its funds from a low-ftylng airplane. That letter helped prompt USAID's wlthdmal and, clrculatlng in the Bank, reinforced the voices of opposllon to the Bank's repeating loms In the ARDC series.

the decision to proceed remained controversial. The leader of the appraisal team objected to what he considered the Bank's soft conditionality and was replaced before the package of documents was finalized.

C. Project Objectives and Description

1.12 The detailed features of the project are described in the PCR. The two main objectives were to strengthen the formal institutional system providing agricultural credit, and to increase agricultural production. The weights given to these objectives are outlined in paras 4.2ff.

1.13 NABARD I (Loan 2653-IN) was made for USS375 million, of which USS340 million was to reimburse NABARD's rediscounts for term credit, USS25 million was to finance 100 percent of the costs of staff, vehicles and equipment for extending the pilot hum three to 20 districts, USS6.5 million was to support NABARD's extensive training program, and USS3.5 million was to finance 100 percent of the costs of a major reexamination of all aspects of the country's formal credit system. This "Study" was to be carried out by five consultant teams, a supervising p u p of seven experts, and a secretariat in RBI. The Bank sought and received Government's agreement that expatriate 6rms could compete for contracts for at least two of the studies, and expatriates would occupy three places in the expert group, thus bringing international experience to the study process. An essential part of the agreement was the understanding that Government would mwe quickly to elaborate and implement a new credit strategy, based on the recommendations ("blueprint") of the study team, that this would begin just after the end of the three-year time-slice of NABARD's rediscounting program defined as the project period (1986/1989), and that processing of the follow-on NABARD project depended upon it.

1.14 The expectation that Government would carry out reforms recommended by the Study, and the rest of the technical assistance package tied to the on-lending component (including the expanded pilot and enhanced training), enabled the Region to argue successfully that the project was justified in institutional development terms. Bank disbursements were no longer to be tied to NABARD refinance. Rather, they were to be released in four tranche5 scheduled according to progress with the Study, and with the imposition of a more restrictive set of eligibility criteria determining branch bank access to the rediscounts.

1.15 Limits on bank branch participation were keyed to collection performance. The Bank went into negotiations with a proposal to prohibit NABARD rediscounting altogether for branches failing to collect 40 percent of dues - a cut-off that would rise to 60 percent wer the three years. Government refused to accept such a prohibitive" condition - i.e. denying any access to branches below those cut-offs. The Bank then accepted a formula which restricted access of the poorer performing branches more severely than in previous projects, i.e. the amount of refinance they could secure in any future year was a smaller percentage of the previous year's lending volume than had been the case in earlier projects. Eligibility criteria had dominated the appraisal period, with Government arguing that blanket exclusions were politically unacceptable at both state and national levels, and the Bank insisting that without at least a credible threat of exclusion, discipline would never be restored. The controversy continued through implementation, as discussed below.

2.1 The following is a summary of the important aspects of implementation. The PCR provides a more complete account. The Loan became effective in September 1986, two weeks after the scheduled date. The Loan was closed in June 1991,18 months after the original Closing Date. The Bank's US$340 million for on-lending, plus another US$10 million reallocated later to that category, had all been effectively committed by mid-1989. The delay in closing reflects two extensions to continue financing the pilot. All Bank funds were disbursed. The individual project components are discussed below.

2.2 P l m P ~ o ~ ~ c r . 2 ' The pilot was maintained in the original three districts and extended to 12 others. The pilot was modeled after the Training and Visit (T&V) operating system used in several agricultural extension projects. It involved an expanded field staff, increased mobility, assigned schedules for banker visits to communities and borrowers, improved reporting formats and other management innovations. All RRB and LDB branches, most commercial bank branches, and a selected minority of PACS in the 15 districts were included. The pilot did not prove replicable and was not sustained. When the Bank's funds were exhausted at the end of 1990, NABARD decided not to commit its administrative funds to maintaining the pilot's costs. Government claimed that the commercial and cooperative banks' participation was dependent on "symbolic" World Bank support, and, with the end of direct Bank involvement, that participation could not be guaranteed. NABARD in any case considered that the pilot was ready to "graduate" to full operation. The participating banks thereafter would have to fully absorb the higher costs of the heavily supervised credit approach that had been promoted. The pilot is discussed again in paras 4.33ff.

2.3 -G. World Bank disbursements supplemented NABARD and Government funds in strengthening NABARD's and RBI's training programs. These programs had earlier been fortified by support from the Bank's Economic Development Institute (EDI), starting in the mid-1980s. The two institutions have emerged together with a professional training complex of international repute in teaching agricultural banking and supervised credit skills. The program carers training of NABARD's own staff - mostly at NABARD's Staff College in Lucknow - and, with a much larger throughput, training of commercial bank, RRB, and LDB staff at NABARD's Bankers' Institute for Rural Development (BIRD), also in Lucknow (and in two satellite schools), at 14 LDB training centers, and at RBI's premier College of Agricultural Banking (CAB) in Pune. The flagship at CAB is the "rural development projects course" originally put together with EDI's assistance. An additional US$4 million of Bank funds was reallocated to this component during the life of the project. The PCR considers this one of the most successful components. While impressed with the size and comprehensive reach of the training programs, the audit faults them for not giving emphasis to arrears management. NABARD says such courses nevertheless are in the cumculum.

2.4 STUDY. The Bank played a major role in defining the original terms of reference for the h e consultant firms selected under bidding, and for the Agricultural Credit Review Committee (ACRC) that would manage them and prepare the final report. This was the fifth in a series of comprehensive credit reviews carried out in India starting in the early 1950s, all for the purpose of recommending

/ The SAR and the PCR call It the pllot scheme; supenrision repom dl It &her the @lot prolect component or the pilot credit delivery project. The lsst may have been a misnomer, since the pllot was to be evaluated ex-post by afterla that Included Its success In raislng deposits.

extensive changes in governing policies, institutional format, and operating procedures. Thus, the issues were well defined and the outline of possible reforms known. After a slow start with appointment of the ACRC members and selection of consultants, the operation moved into gear and the draft reports were ready in 1988 and the finals in September 1989. The quality of the reports is not uniform - at least one of the consultant firm reports was disappointing. But the general impression in the Bank, NABARD, RBI and Government is that the overall package is comprehensive, and that it provides a useful update of the findings of previous reviews. The audit mission endorses this assessment. Bank missions to India in the period between the issue of the draft and final reports pressed RBI and the Committee to enhance the sections offering proposals for policy reform, as distinct from operational improvements. The final ACRC report deals with major policy matters - bank autonomy, interest rates, etc. Thus the final set of reports also serves the purpose of a blueprint for reform, and it is important to stress that Government now views the final ACRC Review as its own rather than an imposed exercise.

2.5 While "ownership" of the exercise was secured, commitment to reform was not. Hence, the Study's practical utility has still to be demonstrated. When the final report was issued, the on-lending funds had already been disbursed by the Bank (though there were still two years left before the loan was closed in 1991). Although many of the recommendations for operational adjustments have been implemented, no action has yet been taken on the major points of policy. These issues are politically sensitive, and dominate the agenda of discussions for the next proposed NABARD project. Some of the recommendations with limited political sensitivity have been delayed by the diEficulty of delivering a coordinated response by a wide variety of public institutions. The sheer size of the effort required to secure compliance has so far been beyond even RBI's and the Ministry of Finance's formidable influence. In the audit's opinion, if the Government were to accept and enforce the adoption of the major policy points, most of the other valuable recommendations would follow them into practice.

2.6 ON-LMDING. Since the Bank disbursed in tranche, and its funds were a small share of overall lending, they cannot be associated with any particular investment (other than a general association with the eligible on-lending categories). The tranche progression was upset by the two- year drought of 1986/88, said to be the worst of the century. It caused Government to request the Bank to expand the second tranche at the expense of the next two, and also to suspend all eligiiility criteria that had been programmed for that time. The Bank acceded to the first request, but agreed only to postpone the next scheduled increase in the eligibility criteria

2.7 Bank supervision was handled until 1989 mostly Erom headquarters, after which responsibility passed to the resident mission. The latter supervised the pilot throughout. Headquarters retained the main responsibility for managing Bank involvement in the Study, with resident mission support. Supervision concentrated on the technical assistant components. There was no on-farm supervision of NABARD's on-lending program per se, as financed by the project, either from New Delhi or Washington. But the Bank had many other projects under implementation with NABARD credit components and thus other windows were available to observe performance of the Indian rural banking system and its impact at the field level . 2.8 With respect to the distribution of subloans by category, the PCR provides tables showing allocations for the regular and povertysriented programs. Minor irrigation consumed the largest share of investment credit refinanced by NABARD (44 percent), with tractor purchase and dairy development occupying the next two positions (19 percent and 11 percent respectively).

2.9 The issue that dominated Bank supervision of the on-lending component was - again - the application of eligibility criteria. Reacting to the drought and other factors, Government requested several delays and exceptions in applying the formula. The Bank accepted some of these modifications, but in general tried to maintain the discipline agreed at appraisal. Fueling the debate we r eligibility criteria was the flow of data from reporting banks showing that collections were not improving. There was a wide range of collection performance indicators, depending on the type of bank, predominant investment activity, state, extent of rescheduling, etc. "Average" figures can be misleading. Nevertheless, at appraisal the Bank had used an average figure of about 55 percent to represent the level at which aggregate collections had settled before and during ARDC IV (the collection rate defined as collections over collectibles). It was the implicit objective of all of the project's institutional and policy initiatives to raise that figure. That did not happen. Bank analyses at the end of the project on-lending period (1989) show that while there was no evidence of a significant decline in collection performance since the early 1980s, there was also no sign of improvement in recoveries. The delinquency issue is discussed further in the last chapter of this report.

2.10 There is a technical issue embedded in the on-lending experience which was poorly covered in supervision and is not mentioned in the PCR. The legal agreements state that any NABARD refinance of loans for minor irrigation works should be restricted to those which complied with regulations covering exploitation of the country's groundwater resources. Areas of each state were already divided into three categories, where private and cooperative welldrilling had to meet increasingly severe spacing standards. The SAR called for supervision missions to visit State Groundwater Organizations with regularity to check compliance. But, with one exception, the supervision reports do not comment at all on the degree to which the drilling in "grey" and "dark" zones was properly controlled. One of the last supervision missions out of New Delhi (in 1990) included an engineer to look into this issue, and his report to the Bank indicated that performance appeared to be in "partial" compliance with the regulations, although controls were weaker than required and the situation was likely to deteriorate. The Bank was supervising several irrigation projects at the same time, and felt that they were a better vehicle to assess compliance on groundwater exploitation. Nevertheless, the lack of any other reporting on the issue in the NABARD I supervision portfolio, despite the requirement, and the qualified status of the 1990 expert opinion, suggest that this aspect of the project has been handled rather casually by the Bankg If it was being adequately followed in supervision of other projects, then at least those reports should have been reflected in this project's supervision file, and assessed specifically in terms of the NABARD lending program.

Y W A R D says thm It adheres to the aystem, but there have been devlatlons at the loccrl level (Anm 2 para 8).

3.1 The Overall Status ratings reported by supervision for the project held up at "2" (moderate problems) from 1986 through 1988, though the last in that series slipped the Development,Impact rating to "3" (major problems). The ratings given by these five supervision missions, handled by the same financial analyst from headquarters, were largely influenced by the apparent progress of the Study and the other technical assistance components. The supervision reports incorporated the resident mission's routine review of the pilot project. In 1989, after supervision responsibility passed to the resident mission, the Overall Status rating declined to "3" that year and "4" (major problems, inadequately addressed) the next. This was influenced by the fact that the ACRC report was then available, yet Government did not appear to be prepared to act on it. Also, as discussed in the next chapter, the politicians in 1989 were beginning to discuss a major debt-waiver scheme. These disappointing developments prompted Bank supervision staff to look more closely at the wider credit arena where US$350 million of the Bank funds had been deployed. They concluded that progress in reforming the system was minimal, and rated the project accordingly.

3.2 The supervision reports provide little data on production impact, and Part I of the PCR, prepared by the Region, devotes a single paragraph to it. Part II, prepared by NABARD, provides more of this data, and both parts refer to the growing body of competent, ex-post evaluations of specific sub-sector schemes camed out by the Economic Analysis Department at NABARD's Bombay headquarters and by NABARD's regional offices. Part I1 presents summaries of five of these scheme- level evaluation studies in one or more districts (for bore-well, tea plantation, tractor, cross-bred ccnvs and lift irrigation district schemes), along with scheme-level rates of return. The economic rates (9, 32, 36, 13, and 52 percent, respectively) compare on the average favorably with the models in the SAR, lending force to assertions in both parts of the PCR that on-farm impact was significant. As mentioned above, earlier PCRs and PARS had come to the same conclusion.

3.3 A pioneering study of the relationship between the growth of formal rural finance and the development of the rural economy of India was issued by the Bank in 19SQ.Iqt is an econometric analysis of national credit, production and employment data One of the findings is that the agricultural production effects of credit have been positive but much less than anticipated. However, the aggregate production impact assessed in the study is the sum of increases on the investing (often irrigated) farms, and increases and decreases in production on non-participating (usually rain-fed) farms. The study does not explore these differences. But one plausible inference from the study is that resources on the non-participating farms were shifted out of crop production as a result of the NABARD lending. This would imply that the incremental increases on participating farms were substantial enough to depress crop (especially food) prices, so that the b e n e f i t a t assumptions (about constant prices) of the SAR models no longer held And this in turn would imply large consumer surpluses and positive welfare benefits. Major increases in food availabilities, reduced prices, and, therefore, enhanced food security of low income families would be a powerful argument in favor of continuing the program, as Government claims. The 1992 study does not investigate these issues, and the level of aggregation does not allow a conclusive assessment of the NABARD experience. Other work camed out by the resident mission suggests a much weaker causal relationship, with decreases in NABARD credit in 1990 showing no impact on the volume of

3 Blnswanger, Hans and Khandker, Shahidur. The Impact of Formal Finance on the Rurd Economy of Indiam. Policy Research Worklng Paper Serles # 949. World Bank. August, 1992.

production. These contrasting macro-level reviews reinforce the conclusion that Government and NABARD, with Bank support, ought to substantially expand their analyses of the relationship between credit availability and production on and off the borrowing farms.

3.4 All Bank disbursements were made for what is called NABARD's "schematic" lending portfolio, where refinance was provided for branch bank loans for farm h t m e n t s that conformed to representative investment packages that had been approved in advance by NABARD for district- wide use. This is a highly targeted procedure, but the great variety of pre-approved schemes means that most farmer proposals are in principle acceptable.

3.5 Within the orbit of NABARD schematic finance is a poverty-oriented term credit program directed at the lowest-income rural families. The Integrated Rural Development Program (IRDP) was formed in 1978 by consolidating a number of ongoing programs targeted at the rural poor. To qualify, applicants have to fall below the "poverty line" - an annual income benchmark of about US$300 per family. Garemment's intention was to bring about three million farmers, 600 from each of India's 5,000 blocks (subdistricts), under the IRDP umbrella each year. IRDP received above 30 percent of NABARD term refinance in the late 1980s. The Bank and Government disagreed over the eligibility criteria to apply under the project to some non-agricultural categories of IRDP lending. Government omitted these from project accounts, and ultimately only 20 percent of project disbursements were assigned to the program.

3.6 The weaknesses of IRDP were one of the main concerns of the PAR on ARDC IV. The NABARD I PCR also discusses the IRDP program. The quality of the IRDP portfolio is worse than the regular portfolio, due to rapid growth in the number of accounts, limited supervision resources, poor cash-flow position of farmers, making repayments dificult even when the investment itself gave good returns, and a higher incidence of diversion. The audit agrees with the PCR assessment that there have been several important measures taken to improve IRDP. It accepts also the PCR's judgement that major failings of the IRDP program cannot be remedied without adjustments in Government's policies for extending both credit and welfare, particularly when it mixes the two. The Bank has been urging Government to recognize the welfare character of IRDP and separate it from the main refinance program, to give participating banks more freedom in selecting clients, or at least to let the banks administer the program as agents on behalf of Government without risky

3.7 The conditionality of NABARD I included measures - initiated under ARDC ID - to correct the deficiencies of what was widely perceived to be the weakest part of the institutional apparatus for rural credit - the Land Development Banks. The Regional Rural Banks have also run into systemic problems - associated with their dedication to low-income farmers and consequent high share of IRDP lending - that may lead to reorganization. The ACRC recommends that the RRBs be absorbed by their sponsoring commercial banks. The PACS have their own problems, attributable to their small size, to their inability to diversify the crop accounts that form the basis of their short term loan portfolio, to political pressures and to other features that have nothing to do with their credit operations. But it is the LDBs that have long been recognized as forming the weakest link, and it is there that the Bank intended that its projects concentrate the remedial program. Six state LDB systems had been especially targeted for rehabilitation in ARDC IV. That program was unsuccessful. NABARD I was to deal with all problematic LDBs and their network branches.

9' NABARD insists IRDP la a comrnerclal scheme. R says that wlth the decline in Iflation in mid 1993, IRDP Merest rates 'can no longer be considered conceasionar (Annex 2, para 10).

3.8 As shown in the PCR, and as transpired during the previous project, practically no progress was made toward the objective. One reason was cited in para 1.10 above: the LDBs (and the PACS) do not come under the authority of the national banking legislation, they are controlled by the states, and neither RBI nor NABARD have the idhence needed to enforce reform. In the case of NABARD I, the formula agreed at appraisal for the states to cover 50 percent of the costs of the rehabilitation program was not honored, partly because of state budgetary shortfalls. NABARD was both unwilling and unable to proceed on its own. LDB performance varies so widely from state to state that it would require a report of its own to present the LDB problem in sufficient detail. Nevertheless, discussions of the LDB problem end up at the same point: the political factor is a dominating influence in the appointment of board members and managers and, therefore, in the uses and abuses of LDB loans?

3.9 It should be pointed out that the diversity of experience across India in virtually all features of the credit system makes any general characterization a gross simplification. Collection performance, IRDP, the pilots, and even the LDBs' record look g d or bad depending on the state - or sometimes even the district. A good performance under one heading may be disappointing under

another. Punjab and Kerala do well in most respects: even for LDBs the collections are above 75 percent. Some other states could be identified to compose a "short list" of success stories. If ARDC IV or NABARD I were evaluated from the limited perspective of the best performers, the overall rating would have been "satisfactory". On the other hand, an "unsatisfactory" grade would be generous for the worst performing states grouped together.

3.10 In June 1989 OED issued a PAR on ARDC IV, which concluded that Bank participation had hurt rather than helped the agricultural credit system by postponing the necessary policy reform. The PCR on NABARD I reaches the same conclusion, and rates the new project also as "unsatisfactory". The Region considers that NABARD has done a credible job in the areas of operation which it could control, and that the three technical assistance components had generally commendable results (including the production, though not the implementation, of the Study report). But it feels that the on-lending program and the delinquency it seemed to perpetuate has not moved the credit system beyond the sick condition criticized in 1983 by the Bank's senior manager. That was the project's main target and, in that sense, the project was a fai1ure.Y

3.11 The audit accepts the overall judgement that the project outcome was unsatisfactory. The main objective of institutional and policy reform was missed. However, the audit feels there are some favorable features in the project experience that deserve more attention, for reasons explained in the next chapter. The solution to these complex problems is so important to the development of the rural sector as to suggest to OED that the NABARD system could benefit from continued Bank support, provided Government is willing to commit itself to a program of acceptable progress toward the recommended policy reforms.

8' Committee recommendations on democratization, depditiclzation as well as professionalization ot the cooperathrerr have been accepted by government and circulated to the state governments for acceptance and Implementam.

NABARD calls this Judgement 'premature' (Annex 2, para 14).

IV. FINDINGS AND ISSUES

4.1 The first four of the following six sections discuss the features of the NABARD credit operation that deserve more attention than they have heretofore received. In the aggregate, they do not reverse the overall unsatisfactory performance rating given to the project. But, in the audit's view, there are many signs of institutional maturity at the level of NABARD and the banking agencies and divisions which bodes well for further progress.

A. Developmental Objectives

4.2 First, it is important to point out that the priority given to the various project objectives - at appraisal and at closure - help explain the different views the Bank and the Borrower have on NABARD I. The Bank's rating is based upon the lack of any substantial progress on policy issues (that had been agreed at appraisal or derived fiom the ACRC study), and several important shortfalls on the institutional side (most notably the failure of the LDB reform proposal and the 1990 debt waiver scheme discussed below). Government saw NABARD I also as a three-year time slice in a program demonstrating Government's intent to use the formal, official credit system to increase India's farm production and food security, and to p d h formal banking facilities into an increasing number of towns and villages, thereby giving access to a steadily expanding number of nual households previously with access only to private moneylenders. While the Bank is correct to emphasize the failure of the first objective, credit must be given to the other two.

4.3 It is clear from the files that the Bank intended to give this three-year project an orientation toward policy and institutional reform that was not there in previous projects. It is equally clear that neither NABARD nor Government ever fully accepted this goal as an overriding imperative of the operation. In fact, the President's Report in 1986, while undoubtedly aimed at reform, puts farm production first in its summary listing of project objectives.

4.4 The Government also does not recognize the image of a credit system collapsing under the weight of mounting arrears, costs and indiscipline, a scenario evoked in Bank reports especially since 1988. Government has a different perspective. Since the 1969 nationalization decision, the agricultural credit system has been expanding at unprecedented rates. The expanding outreach of the banking networks into the villages is another source of satisfaction.

4.5 The collection rate remained steady despite rapid growth of the portfolio - at least up until the waiver scheme. Data is on file to support that assessment and the Government insists it is s0.U On the other hand, there is no disagreement about the decline in the viability of the financial

structure of many participating banks. That is particularly true of the RRBs and many of the PACS. Commercial banks that cannot cover the agricultural losses by earnings on other sector portfolios are also in greater trouble, due to narrowing margins and the impact of the high losses in the IRDP account. Most of the commercial banks have given their IRDP portfolio much less professional attention than their regular agricultural loans, especially at loan appraisal. Thus, since LRDP expanded rapidly in the early 1980s, the share of the overall commercial bank portfolio falling into

Thla ls also the ludgement of the authom of a recent report from the lnternatlonal Food Policy Research lnstttute on World Bank lendlng to agriculture, whlch mentlons the lndlan credit program. IFPRI, Michael Upton and Robert Pearlberg, The Role of the World Bank In Agricultural Development In the 1990~'~ Washington 1991, page 18.

this high rislcilow-intensity-management regime has increased. But while the commercial bank system has survived IRDP, it has been with the help of NABARD's discounts at below market rates and coverage from the Government's loan guarantee system.

4.6 On the positive side, operational procedures in most of the agricultural portfolios have been improving. And, under pressure from NABARD and Government, standards for managing IRDP have improved as well. NABARD's grip on the system has improved throughout the period. Alongside the pilot, and its set of management instruments, NABARD and RBI were also introducing an expanding series of management reforms. Innovations such as the "district service plan", qead bank scheme", "service area approach",g W a g e profile", "case-by- analysis", "health code", "demand collection balance register", and the expanding cadre of "district development managers" are part of them. In many cases the innovations were developed by the RBI's Rural Credit Planning Department and supervised by inspectors from both RBI and NABARD. They should eventually materialize as improvements in the efficiency of lending and recovering funds. Since neither ARDC nor NABARD had any legal authority over either the cooperative or the commercial banking systems, some persons at appraisal considered it risky to assume that NABARD would ever be able to assume the influence it needed to carry out the intended reforms. But that situation has changed, and NABARD has indeed earned increasing respect and response from both groups. It relies mostly on moral suasion. Yet in recent years it has moved decisively by blocking funds h m a few recalcitrant state governments, who tried to repeat a waiver scheme, revealing it can draw on reserves of strength and influence. Partnership with the Bank has been instrumental in enhancing its leverage.

4.7 It should be mentioned that NABARD has avoided the process of decapitalization as experienced in Latin America - due to high inflation, low interest rates and the failure to recapture real loan values - because the real interest rate has almost always been positive. Losses were incurred due to the high operational costs and inadequate margins, but these were of a lower order than the Latin America leakage. Also, the threat of decapitaliition from bad debt does not pose the problem for NABARD that it does for constituent banks, because NABARD always recovers repayments from new advances to the participating banks. While it discounts at low interest rates to the participating banks, NABARD receives cost-less funds from RBI to support the program. Its financial strength is dependent on concessional funding. Government's commitment to the program seems so well embedded in the national priorities, that NABARD - though not financially self-sustaining - is being sustained.

4.8 None of the rationale given by Government weakens the merits of the Bank's emphatic argument in favor of system reform, particularly the removal of the politicians h m credit management and the shift toward higher interest rates. Over time, those reforms are essential to reducing default and, thus, to system sustainability. However, it should also be recognized that any widely-based agriculture and rural lending program, which includes the rural poor, is a high-risk, highcost operation.

The PCR describes the servlce area approach (SAA) as a blg step back from market-Wed benklng and toward monopolized services. The Indiana argue R Is necegsary to better control costs and recovefles. The author of the PCR has subsequently ampred that SAA does offer advantages In buiidlng credlt dlsclpllne and that thls result may outwelgh the losses In competition in the short fun.

B. Delinquency: the Collection Rate

4.9 The collection rate was of great concern during appraisal, and was the basis established in the legal documents for determining elipiility during implementation. But this rate is not an efficient instrument for assessing improvements in repayments, and it can be misleading with respect to that fraction of overdues that will end up irrecoverable and eventually have to be written o& When arrears reach a level of almost 50 percent, as in India, then they clearly point to major problems of debt administration and d ip l ine . Nevertheless, to measure progress away from that unsatisfactory position, and especially in countries like India where repayment performance is poor by any conventional standards and improvement is an essential component of institutional development, it is important to have accurate measures to assess bad debt. The NABARD networks do not read@ provide those measures, and NABARD has not made sufficient effort to ensure that one way or another those estimates are availab1e.g

4.10 One problem is that write06 and rescheduling can undermine the legitimacy of the collection rate in analyzing repayment performance. If write-ofi are not made, then the rate is likely to deteriorate regardless of modest success in increasing collections. This is shown in A ~ e x lB, where examples with and without write-off are compared. The more probable condition is that the banking system overindulges in debt rescheduling and forgiveness, in which case the estimates will show a spurious improvement.

4.1 1 But a bigger weakness in delinquency reporting is the missing data on the composition of delinquency, and especially about the Likelihood of delayed payment resulting in irrecoverable debt. Late payment is never desirable (unless the repayment schedule itself is compressed and unrealistic). But delay on its own is not default (default defined here as irrecoverable bad debt), and the consequences and implications can be strikingly different.

4.12 The audit examined the relationship between delinquency and default with some time-series models. They are discussed in Annex 1C. They were designed to relate those two factors also to the length of the delay in payments. They suggest that under certain conditions, high levels of delinquency are consistent with much lower levels of default, and also that even the delay may be rather short. For example, they show that 50 percent collection and 15 percent default rates are consistent with a delay of only one period: the new dues that should have been paid in year 5, for example, are paid in equal installments in years 5 and 6. Other models might be v t e d to give different results. And the audit is not suggesting that these models represent either good credit practice or Indian performance. Nevertheless, they reinforce the point made in paragraph 4.9 that collection rates in themselves provide insufficient data from which to trace the ultimate effects of delayed payment.

4.13 Fmed point estimates of both delinquency and default are hard to ge t The 50 percent collection plateau referred to here is a conservative OED estimate of a range reflecting many different estimates of rates for different bank and different years. It is consistent with the ACRC report and the Bank's point estimates. The audit also sought estimates of &fault for the averall Indian rural credit portfolio (formal credit). Eight of these sources are cited in A ~ e x lA, including a senior official of the Agricultural Credit Department of the State Bank of India (SBI), the largest actor in this field with half of the outstanding commercial loans. Bringing together all of these

9' NABNAB insists that an adequate reporting system is n w In place (Annex 2, para 16).

default projections, the audit concludes that 15 percent would be a reasonable upper estimate of the actual default parameter in the formal credit system.2 It is assumed that the estimates are inclusive of rescheduled debt that is itself bad; otherwise they are misleading. The estimates predate the extraordinary waiver exercise of 1990, and to that extent are of questionable present validity.

4.14 Nevertheless, it is changes in the trend line of the default figure that matter as much or more than the collection rate. Yet default trend analysis is not available. Thus, the Bank cannot refute Government's assertion that most of the overdues is being recovered, and Government cannot back-up its claims. Despite the lack of systematic reporting, NABARD has provided the Bank with some summary annual estimates useful for the analysis of irrecoverable debt for the different commercial banks and the other major banking systems. While the absolute level may be disputed, these tables suggest neither improvement nor deterioration of the level during the 19809, at least up to the 1990 waiver exercise.

C. Debquencg: Portfolio Growth

4.15 A 50 percent collections plateau gives cause for concern in any situation. But analysis of delinquency is complicated by the growth of the rural credit portfolio. Term credit has been expanding dramatically, especially commercial bank and RRB credit. Total commercial bank term credit grew seven-fold in the 10-year period 1976 to 1986. In real terms, that amounts to a tripling of the term credit volume. Figures on the growth of the ARDCNABARD term credit portfolio and the number of term credit accounts are not available for the interval of the 1980s covered by ARDC IV and NABARD I. But it is reasonable to assume the real volume and number of borrowers tripled in that decade as well.

4.16 Growth could have been expected to depress collections further. For two reasons. Fit, expansion would have had a negative impact on the efficiency of credit management - as appraisal, supervision and collection capabilities lagged behind portfolio gr0wth.Y Second, there would have been a further impact on collections as the system extended into marginal areas and poorer social strata. IRDP increased during the decade from about 20 percent to 30 percent of the NABARD portfolio, bringing in higher risk borrowers. These two factors - lending volumes outstripping banking services and the relatively faster growth of the poverty lending lines - could be expected to depress collections. The system appears to have offset those pressures by improvements elsewhere.

4.17 These considerations could also imply that many more reasonably disciplined borrowers were being brought into the system than willful defaulters, and that Government's intention to rapidly spread these banking disciplines was actually being met (para 4.2).

4.18 This is not to invite complacency. The 85 percent recovery estimate is uncon6rmed, it would have declined with the 1990 waiver, and in any case no program can tolerate that level of

9 NABARD offers fhre percent as a better estlmate of bad debt, but accepts that more mdysIs Is needed.

The IFPRl report clted In footnote 11, para 4.5, entlclpatea Increases In armam In all eocpandlng systems. In a section that mentlons the lndlen 0xperl@nCe, lt states:

'... some Increase In overdue payment (although much less in bad debts) b lmpllcl In the early expansbn of producer credlt to new areas, es ere learnlng effects. Thls Is dmllar to the Wtial losses that an expanding retall buslnesa expects on b new branch shops.' (page 20)

default for long. Also there are negative features in the Indian case - other than the waiver - that threaten to depress it further: the increase in political interference in lending and repayment decisions that has been widely perceived in the 1980s (and discussed in the ACRC report); the evidence that willful delinquency (as a component of overall delinquency) is more widespread than suggested above, as farmers stretch out the repayment period hoping that part of their debt eventually will be forgiven; the replacement of LDB Boards by state appointed managers, etc. Some other characteristic of delinquency and default are discussed in Annex lk

D. ARDR: O w n s and Implementation

4.19 The Agricultural and Rural Debt Relief Scheme (ARDR) was first proposed in early 1989 in political platforms leading up to the November elections. There were several variants in that election posturing, targeting dEerent numbers of farmers who could participate and different levels of write-off per farmer. The winning party had not expected to win, and not all of its leaders supported its campaign proposal, which was to forgive up to Rs 10,000 (about USS500) of principal and interest each for a defined group of indebted low-income farmers. Nevertheless the party decided after victory that its election promise had to be respected, and it insvucted the administration to cany it out.

4.20 In the neighboring country of Bangladesh, where a series of major relief and waiver schemes had been implemented starting in 1984, the repayment discipline has been seriously er0ded.N But ARDR was the first country-wide write-off exercise in India It attracted debate throughout the states, the banks, and the government economic ministries. There had been several notorious cases ten years before of state governments relieving debt on a broad scale. And in 1988 Government had ordered the banks to reschedule (not write-off) repayments affected by the drought. Also, politicaliy motivated campaigns to approve new loans in local rallies had become increasingly common during the 1980s (the "melas"). These often ignored the rule that applicants present their "no dues certificatea showing they were clear of debt. ACRC had warned that political interference in credit management was on the increase. But ARDRE' was recognized as lifting relief to a new scale.

4.21 One of the important features of ARDR is the process by which it was implemented. To understand this, one has to look deeper into allegations about the "government" doing this or that. F i e r distinctions are needed. The "government" that won in 1989 and declared the ARDR effective instructed its civil service and financial institutions to implement the scheme. There was almost unanimous opposition in those circles to the blanket waiver. Moreover, by the time the scheme was operationalized and ready to be activated, "government" had changed again. The new administration supported the ministries in their effort to minimize the damaging effects of the scheme, and to turn it to the extent possible to worthwhile purpose.

4.22 The Banking Division of the Ministry of Finance was responsible for defining the rules of the game. At first it tried to limit eligibility to low income farmers, by restricting the waiver to those with total overdues not greater than Rs 10,000. But it had to give way under pressure (during the administration of the 1989 government) to open eligibility to indebted farmers with overdues greater

Any comparison wtth Bangladesh must conslder the greater propensky for natural calamky In that deltaic country, and the tact that dlsaster relief Is an Inevitable feature d elealon campaigns.

The reader must continue to put up wlth this use d the dose acronyms ACRC, ARDR and ARM;.

than Rs 10,000 - though that remained the limit of the write+& This adjustment has sometimes been d e s c n i as a take-over by the rich farmers, but the great majority of the eligiiles were small farmers, and, at $500 each, the windfall for the minority of larger farmers was relatively small. In other ways the scheme as planned provided rules of eligiiility that were weU de£ined at the national l e d It was clear during audit visits - to branch banks of the nationalized commercial banks (the sunriving private commercial banks were excluded from ARDR), RRBs, LDBs, DCCBs and PACS in three states on the mission's itinerary - that the selection process as it was instraunented at the local level was indeed under some measure of controL

4.23 The audit mission inquired at eight diierent branches of all categories of banks about the numbers of delinquents eligible and participating, and everywhere the pattern was the same. As an illustrative case,s if a branch had 500 active farm accounts, of which 300 were delinquent, then 150 of the borrowers passed the eligiiility tests and got up to $500 written+ff. Only 100 of those would have had overdues less than $500 to begin with and were therefore cleared, If they were also £ree of any outstanding debt, not yet due, their account was "closed" and they could apply for new loans.

4.24 There were two routes to eligiiility. One was to have had overdues outstanding as of October 5 1986 - Mahatma Gandhi's birthday - which the 1989 gwernment accepted as a cut+ff date for its election promise. Moreover, the werdues had to already have been reclassified as "chronic". For the commercial banks, subject to national banking legislation and RBI control, that meant having had already shifted them to category 8 of the banking system's relatively new, so-called "health code", the highest category and signifying "bad and doubtful debt". The cooperative banks, which did not use the health code, had other processes for determining "chronic" conditions. And £inally, the branch was obliged to make a judgement whether the delinquent was in that status willfully, or there for circumstances beyond his control Willful delinquents were supposed to be scrupulously ezludexl. Obviously there was room for "maneuvering" at the local level, but the suaxssive reductions in the numbers of final participants shows that even so the cutting process was teal Tbe other class of eligibles were those whose delinquency could be explained by two p a n of drought within the three year period 1986-1989. Again, there was room for favoritism, but this abuse also seems to have been contained.

4.25 In fact the politicians from the 1989 governing party felt that the narrow eligiiility criteria represented much less than what had been promised the electorate. But the Ministry of Fmance, RBI and NABARD held firm, and, with the next change in government, their efforts were reinforced.

4.26 This is the positive side of the narrative. Tbe original waiver proposal remained a detrimental enterprise with respect to credit discipline. It also impared a massive cost on the central and state governments. Tbe proposal was first vetted and then sanctioned by Gwernment during the period when the Bank was trying to get agreement on application of the ACRC recommendations. The waiver announcement was seen by the Bank officers as utterly inconsistent with the new plan and a major blow to their hopes to salvage the processing of a repeater project. Moreover, in the uncertainties of how the waiver would ultimately be dispensed, and in the breaches that were tolerated in application of the official plan by the local branches, the outcome in many areas was worse than expected. Farmers who should not have gotten a waiver did so, and farmers who did not

Thb model repeaem a set d wkWy dlf?mmt actual encountera durlng the audlt There were no bank-wlde or rrcltknsl ataWc8 arallable.

get them delayed their payments in the hopes that the scheme would be expanded. The overall results were better than they might have been, but that can never justify the intervention.

4.27 Nevertheless, the details of this operation cast a different light on the waiver scheme than that seen by the Region or as demi'bed in the PCR. In the audit's view, the manner in which it was eventually organized - assuming it could not be recalled - shows a level of institutional maturity that warrants attention.

4.28 Whether the effects of the waiver will pass away without long-term damage to credit discipline is uncertain. In its 1990-91 annual report, RBI showed its deep concern for the aftermath. The following quote is an excerpt from a longer passage in the PCR:

W i l e there are time-tested p d u r e s for affording relief to borrowers affected by natural calamities, across-the-board loan and/or interest waivers have seriously impaired credit discipline. This discriminates against those who repay their obligations and also damages the health of the credit institutions" (page 11 of the PCR).

The high cost of the operation - the PCR says final costs will be around USS4 billion - is the as* that explains most of the subsequent reaction in Government. Political as well as administrative leaders admit the exercise was a mistake and should not be repeated. In subsequent election campaigning, the temptation to offer further waivers has been ignored, and most Government and NABARD officials told the mission it is "unlikely" to ever happen again. That is the reverse of the situation in Bangladesh, where most observers see no evidence that the series of relief exercises has ended.

4.29 Also, NABARD and its associates in the banking community have been active in damage control, trying to convince the farmers that the exercise will not be repeated. The message seems to be getting through. At the time of the audit in late 1991, a spot check of collection rates in each of the branches visited indicated that the decline of collections in 1989, that reflected the public's awareness of the impending write-o$ did not plunge further in 1990 and seems to have recovered slightly in 1991 (the waiver was appropriately netted out on both sides of the ledgers for this analysis).

E ARDR: Reducing the Chronic Accounts

4.30 The ARDR story has another dimension. As suggested above, plans for executing the write- off were partly propelled by the effects on farm incomes of the drought of 1986-88. While the inspiration for the waiver was wholly political, the Banking Division and other agencies felt it could be turned to some good effect. They had become increasingly concerned by the build-up of non- recoverable loans on the boob of the banks. In local terminology the system was said to be "choking", or "clogged", with chronic overdue accounts. But not all of these were considered the result of willful delinquency or default. One of the legitimate arguments for "unclogging" a portfolio in any country is to reduce that overhang of delinquents and allow thow classified as non-willful ("benign") and still good credit risks back in the ranla of acceptable borrowers. At meeting after meeting with bankers in three states in India during the audit mission (Maharashtra, Rajasthan, Tamil Nadu), they claimed that the "unclogging" should be a valuable product of ARDR Government officers in New Delhi seemed to be split, in their discussions with the audit mission, over whether the choking issue was an important reason ex-ante for going ahead with the scheme, or simply an a=..

rationalization. The majority said the latter, and the Region says so as well. Nevertheless, in the Banking Division and elsewhere it was certainly one of the determinants of designing the eligibility rules for the waiver. Their intent was to clean out the chronic portfolio.

4.31 The audit explored this issue at the branch bank level. The question was whether the chronic delinquents who were completely cleared and had their borrowing eligibility restored had retumed for new loans. ARDR covered both seasonal and term lending, but in these discussions the audit mission was inquiring whether the participants had returned with a new investment proposal. The answer in most places was no. In fact it was an emphatic no, with some branches reporting that none or OI@ a handful of cleared clients had retumed for credit. An exception was in one area near Madras, where the majority of cleared delinquents had applied. Since a large proportion of the participants of ARDR had fallen into debt in the IRDP program, the fact that they did not return is not so surprising given that IRDP does not permit repeat loans to the same household. These farmers would not have been equally attracted to the higher interest rates that accompanied the non- IRDP lines of credit. But another answer was given in several meetings. Many branches already had their borrowings from NABARD restricted because of poor collections. They were short of funds for re-lending. Exdelinquents freed by the waiver were stilled deemed credit risks and put at the end of (or thrown off) the queue. This explanation was rejected in other interviews, but it sounds plausible for some cases. Nevertheless the failure of the rest of the cleared borrowers to return is a worrisome sign that bears close scrutiny. If it holds up, it is an important finding that has implications for any country that is looking for ways to release the choke and bring credit-worthy farmers back into the formal credit system. Release may not bring them back.

F. Pilot Project

4.32 The pilot scheme was a Bank-promoted innovation. Initially NABARD was luke-warm toward it, though there were officers in NABARD dedicated to making it work. When a pilot for three districts was first proposed during the 1984 Bank review mission, of which the founder of the T&V extension system was a member, the Government only reluctantly acceded. Government also resisted expansion of the pilot to 20 districts when the design of NABARD I was being finalized in 1985. In both cases Government was unwilling to use public funds to underwrite a scheme of uncertain practicality. It argued that evidence was not forthcoming that the first three district pilots were bringing the expected benefits, and that NABARD should wait for such evidence before agreeing to expand. NABARD's refusal to use its own funds, to maintain pilot project disbursements to cover the additional costs to participating banks following the exhaustion of the NABARD I loan, is consistent with this profile. By 1990 there was still no good evidence of substantial impact, a point that was later confirmed by the ex-post evaluations of the pilot. The Bank's resident mission had by then reached the same conclusion: that the pilot had not reached its primary goals.

4.33 Nevertheless, at the operational level NABARD's field force pushed the scheme in the selected districts. There were basically three elements to the pilot. The driving philosophy was that to improve management of their rural savings and lending portfolios, the banks had to strengthen face-to-face contacts with actual and potential rural clientele. This increased level of exposure was the sinequa-non of the pilot, and bankers will assert today that in the selected districts the utility of the new orientation has been demonstrated and it is being extended to other districts. A second element is a series of new ledgers, reports, meetings and village visits that help put the system into play. These include the "client register", "daily diary", "monthly training meet", "fixed visits" and other handy titles that are characteristic of the extension T&V method. Most of these innovations have

proven their worth in setting up new operating procedures for Indian rural credit. They have also been largely accepted. Each in its own way, most of the main banking networks have adapted them to their own cultures and are gradually extending them outside the pilot zone.

4.34 The third element comprises the expansion of the rural banking staff - measured by higher stwclient ratios - and adequate transport for all credit and collection officers. This was supposedly the key to the whole pilot operation. This is where most of the Bank's funds were put to use, and, after they ran out, NABARD refused to resupply and the banks have been reevaluating their commitment. As mentioned above, and as the PCR discusses in some detail (para 1.23), there was a joint ex-post review of the expanded NABARD I pilot by both NABARD and a consultant social science research institute in Bangalore. It faded to come up with any convincing evidence that the pilot was having a demonstrable impact on critical banking statistics, particularly on the levels of collections and savings. Since this is what the pilot had been intended to accomplish, poor results with these progress indicators are a good sign of why the bankers were retreating from this important element of the T&V experiment. The bankers did not need the evaluation studies to come to this conclusion. For them, the additional staff and vehicles had to pay off in additional earnings, by cutting delinquency and increasing deposits. The payaff was not there, so the bankers have been unwilling to absorb the extra costs. That is not true everywhere. In fact the majority of the extra staff appointed during the pilot were still in place in the pilot districts at the time of the audit. But there are few instances reported in which a bank with operations outside those districts, including the nationalized banks, have brought up the staff strength elsewhere in line with the pilot design - unless for other reasons they were intent on or leaning towards doing so anyway.

4.35 There is no real divergence between the Indian and the Bank's ex-post conclusions on this experience. The PAR and the PCR say the same thing. The "costless" features of the pilot - the importance of face-to-face contact with the village farmers and the detailed protiles of farmers and villages carried in the ledgers, are making their way outside the pilot boundaries. But the element with a significant price tag will fall away unless and until NABARD and the bankers are shown that it pays off. NABARD's reluctance to embrace the scheme, like the resident mission's position, are due to an appreciation that collections and deposits in rural India respond to stimuli more important than banker contact, and that without control over those other factors the T&V impact will have slower and smaller results than the Bank had intended.B

4.36 In sum, the pilot was not replicated but it tested innovative approaches and instruments which have proven suitable for "mainstreaming". The pilot cannot be called a failure, even though it did not achieve a wholesale transformation of the system.

G. Findings

4.37 The audit supports the PCR's evaluation that the project had an unsatisfactory outcome from the Bank's perspective. The principal objective as finally established at appraisal (and sanctioned in the President's Report, SAR and loan documents) must be respected, even though the Government can take satisfaction with progress toward other objectives. The Region and the PCR are correct in saying that Government did not meet a number of its major commitments, and that the project would have been a better instrument for development if it had. However, the audit finds that

Resident mission correspondence repeats a colorful analogy to rweal Its sense d frustration wer the loslng battle d the plld against systemlc weaknesses, llkenlng the pilot effort to 'rearranging the deck chalrs on the lltanlc..

the Bank is not as well informed on some of the critical issues as it might be, in part because the Study and the Government's response to it have not provided the q t e d data. In addition, the audit finds that the PCR has not fully recognized some of the positiw aspects of the project. The following are the findings and lessons that summarize the discussion in this chapter.

(1) MULTIPLE OBJECFIVES. While the Bank and Government agreed on the objectives of this project, they do not agrez on their ranking. The Government's assessment is largely based on the production impact, while it recognizes an important shortfall on progress toward policy and institutional reforms. However the Bank argues that, after a long series of repeater operations, the policy and institutional reforms had priority, that the production test was no longer adequate, and that both of those positions were agreed at the beginning of the project.

(2) P R O D U ~ O N DATA. Despite the good quality of the ex-post schemewise evaluations, production data from NABARD farms is too weak to support contident claims a b u t the incremental impact of the overall program? Government and NABARD should work to improve that data base, with the Bank providing support.

(3) DELINQUENCY AND DEFAULT. It is important that there be a better effort to assess the incidence of both delinquency and default. The first can degenerate into the second, but that is not an inevitable outcome and the instruments for confronting both proceses differ. While the level of irrecoverable debt (estimated at 15 percent) is substantially smaller than the delinquency rate, this is not good enough: it is not "satisfactory" performance. However, more analysis is required to determine the real level of default and how destructive it is.3

(4) DATA ON C ~ ~ O N S AM) O m w m Tbus, NABARD must bring an improvement in the accounting systems at the participating bank level - to permit an accurate assessment of arrears, including the age of these overdues.

D m WAIVER Government and NABARD should study the full effects of the 1990 debt waiver scheme.q Government officers responsible for implementing a scheme they disliked were ultimately successful in limiting the potential damage to a large extent. At audit, the collections seemed to have been recovering from the trauma of the waiver. That does not excuse the policy, and its effects continue to warrant closer scrutiny. Also, The PCR makes a proper distinction between the commendable actions of NABARD (and by implication RBI), and the policy reversals by Government. But a distinction is needed also between political posturing by ruling parties and the civil service responsible for implementation. In this case, "government" made a costly and retrograde decision with respect to credit discipline However, "governmentn made a determined effort to see that the undesirable effects were partially blocked, and to salvage some worthwhile purpose from the relief exercise. It received support from a change in administration - a new "government".

NABARD has more conRdence h Its data (Annex 2, pare 17).

a See footnote 14, page 14.

NABARD says It has recently commk#lloned the N a t W Insmute d Bank Menegment to conduct such a study (Anm 2 para 20) -

The distinctions are important for the Bank in order to decide how to cast its conditionality on subsequent action. And the effort to control the damage is evidence of the development of an institutional maturity that should serve well for the future of the credit system.

(6) RELEASING TFIE a ~ ~ ~ a OF CHRONIC XND-NES& In executing the waiver =heme, Government introduced an acceptable objective of clearing credit-worthy delinquents for new loans, while trying to maintain repayment discipline among the rest. However, tk cleared farmers in the majority did not reapply. Their withdrawal, if more than temporary, is an important observation. It needs to be better understood, because credit systems in other countries are similarly choked with werdues, are looking for effective release mechanisms, and are assuming they will result in return applications.

(7) PILOT PRO-. The Bank tried to apply the T&V extension model to rural branch banking, and in many ways the new credit delivery procedures worked well. The Bank was too . optimistic that this popular field management routine could have a revolutionary impact on credit management in the absence of measures to reduce systemic problems. A widely based, farmer credit system is an operation with necessarily high transaction costs. Any effort to intensify the banker/borrower interface is going to raise those costs. The problem is not peculiar to T&V. It prevented the T&V pilot from reaching the expeckd results in higher repayments and greater banking business, and discouraged the participating banks from maintaining the full model. Nevertheless, useful techniques and instruments were generated and fresh attitudes were adopted as a result.

(8) NEED FOR REFORM. Government, even though serious about reform, was not serious enough to try resolutely to remove the main c0nstraints.g The most important of these were the lack of autonomy of the banking system, due to political interference, the lack of adequate margins to cover the costs of managing credit, and the damage done to normal banking processes by the welfare aspects of IRDP. Those reforms remain on the agenda,a despite Government's satisfaction with the delivery of credit through NABARD and with the estimated increase in production.

(9) BANK'S RCLE The Bank continues to have an important role to play in supporting the development of the refinance system. The Bank should also encourage the development of parallel credit initiatives.

23' NABARD obj- to thk -6&atbtl, Md Ikl8 the 8fw ~@Cently taken by to Imprrrv, the system. It retern again to model leglslatkn under consideretion to 8fop polltlcal lnterterence In the wopemhm (Annat 2 Attachment, para 5).

NABARD 8eys Gwemment has now embarked on a salw of formal sector refama (Annex 2, p m 22).

ADDlTlONAL MATERIAL ON DELINQUENCY AND DEFAULT

1A. REMARKS

Estimatw of Default Some sources in the Indian Government estimated five percent for the audit, which all other so- ruled out as too optimistic. But other estimates are not much higher. For example, the ACRC summary volume points to a figure of about nine percent. It arrives there by analyzing the aging of anean and applying a factor to each age group that estimates the percentage that will not be recovered. This is a conventional way of determining provisioning policy for bad debt. The hcton used by ACRC for each age group seem unrealistically low. The senior A m e b agricultural coouomist who participated in the ACRC senior expert group told the Bank in a 1 m seminar that 10-12 percent may be a more reasonable estimate. The Bank's Regional credit expert in Washin@n, who back-stopped the project after formal responsibility passed to the resident mission, did his own analysis of the age of arrears, raised all of those ACRC factors, and gave a default cstimate of 21 percent. But he says that may go too far in the opposite direction. A recent Bank report on the impact of India's rural credit on farm production needed to make an assumption about bad debt and d the figure 10 percent, with a qualification that it may be too low. A 1991 IFPRI report makes an estimate of eight percent, citing RBI data and an independent study of credit in southern India (see the IFPRI footnote for para 4.5). And the credit specialist from the Bank's Agricultural and Rural Development Department who participated at appraisal of NABARD I preferred an even lower range and estimated 5-10 percent. A h a 1 and important estimate came from a senior officer of the Agricultural Banking Department of the State Bank of India. He also gave the audit mission an estimate of nine percent - based on his department's countrywide recovery data. (His comments on the impact of the agricultural bad debt on SBI's overall finances were another important input to understanding the impact of NABARD's lending.*)

Anatomy of Dellnquencg The anatomy of delinquency should be studied beyond the aging of arrears. The ACRC summary report, in the chapter entitled "the werdues syndrome", highlights the delinquency data presented in the ACRC consultant report that dealt with the role and effectiveness of lending institutions (one of the five consultant reports). There, for example, it is shown that collection rates for the LDBs actually improved by a few percentage points up through 1986. In some states LDB performance was quite good: above 75 percent in four major states in that year, the last year of ACRC's data base.

Ho mUm8ted m the final cost to SBI was not 9% but less than 6% d the agricultural porlfollo, ah% 40% d ttm bad m l cam an Itmured by a government agency. SBI wmmka 16% of Its total portfolio to agdcullun - up to but not kyond the traction wrllten Into government's banking leglakalon. The final bad debt low to SBI f m th maor portrolk - 6% to 16% - Is 'eadv cavered by cross trensfen from other sector portlolkm where Intefa rate# (01th- m4 rkvyr reccnrerlesl) are higher. That, he said, was SBl's obllgatbn to the gavemment's 'aociel bMkklQ goab, and tb reran ttm bank's were netlonallzed. Gken the mall profit margins and equity bases d SBI and the aUmr tW ob#gltkn h n e v e m camled out at a sutmtantial cost to the financial health d the

One would have expected some slippage the next year, as the effects of the drought moved in. Short term credit collection rates by the PACS (not part of the Bank-project portfolio) declined, another component where performance in the early 1980s had been disappointing. But collection rates of the commercial banks improved. This progress may be attniutable to the greater disciplines usually associated with that commercial bank network, and the fact they were beginning to have an impact on IRDP recoveries also. The commercial bank recoveries remained below those by D B , however, reflecting the varying shares of IRDP in the two portfolios (major for the banks, almost none for the LDBs). Again, commercial bank performance varies by state and bank, so that one must get behind the aggregate to understand what is going on.

Other factors also should enter the analysis. Outside of one state - Maharashtra - little use is made in India of procedures linking repayments to crop and other produce marketing. In that state, recoveries in the sugaizone are made automatically by the mills. Cotton and dairy cooperatives have had scattered success as well, but, on the whole, the country has not widely exploited a mechanism that has proven itself elsewhere. Three states account for 93 percent of all "linked" collections. NABARD told the audit that most Indian farmers would not accept credit if repayment was attached by marketing authorities. But it is clear there may be much more room in the system than has yet been exploited.

Another factor that needs scrutiny is the relationship between delinquency and the type of investment. There is an assumption that immtments in the areas where rainfall or irrigation supplies are secure have better collection records. Yet ARDC shows that investments by NABARD in minor irrigation have lower recoveries than in other major categories, such as farm mechanization. One would have to study the regional distniution of minor irrigation schemes to understand that outline. The point here is that this homework must precede any summary judgements about indiscipline and willful default.

1B. Relationship between Delinquency and Debt Write-off

The following model was prepared by the agricultural credit advisor in the Agriculture and N a t d Resources Department during a mission to NABARD in 1992. The narrative is excerpted from Chapter II of his report, dated November 1!292.

"Assume for the sake of simplicity that a financial intermediary (FI) lends Rs.100 at the start of the year, that it collect only Rs.90 at year end, and that the balance of Rs.10 that is not repaid on time will newer be repaid. The FX will continue every year to lend the same amount of money--Rs.100--and will collect the same amount at year end--Rs.90--and will never collect the overdue amount. The reporting on loan collections based on the financial ratio of collection over 'demand'--in the absence of annual provisioning for loan losses or writeoffa-- would provide the following information:

Year 1 2 3 . . . 10

Collection 90 90 90 90 XI0096 = 9 0 % - 8 2 % = 75% = 47%

Demand 100 10+100 (lW)+loO (1[b8)+100

This illustration is sufficient to prove the futility of overreliance on the kancial ratio of collection over 'demand' as an adequate test for collection performance. In the above example loan collection performance is stable for over ten yean when correctly measured against the average outstanding loan portfolio. Of the annual tranche of loans, 10 percent was consistently lost each year. It is the absence of annual write-offs that make this financial ratio inaccurate in portraying the actual collection performance.

Unfortunately, not adequately providing against loan losses has been a main characteristic of the Indian rural fmance system. Some of the financial institutions involved are not allowed to provide for loan losses or write-offs when they suffer loss. As most of them do not generate profit, inadequate provision against bad debts is prevalent. Basing provisioning for loan losses on whether or not profits are achieved is obviously a major discrepancy of the accounting procedures and the financial reporting system. This is because adequate provisioning for loan losses should reflect the actual annual loss due to defaults and the health of the loan portfolio, irrespective of whether profit was made in the reported year.

The same ratio of collections over 'demand' would therefore indicate an extremely different picture when adequate provisions or write-offs due to loan losses is routinely made, as reflected in the numerical illustration below:

Year 1 2 3 . . . 10

Loan portfdlo al start of year 100 100 100 100 Collection 90 90 90 90 Loan porttollo year end 90 90 90 90 Annual wrlte-offs 10 10 10 10

Collection 90 90 90 90 x 100% --=go - = g o - 9 0 -=90

Demand 100 100 100 100

This illustration suggests that, without adequate provisioning against loan losses where werdues constitute a severe problem, the financial ratio of collection over 'demand' gives meaningless or misleading information on collection performance."

1C. Relationship between Delinquency, Deladt and the Pcrlods of Repqmmt

Several models prepared by OED to demonstrate these relations are attached. Collections are assumed to include principal and interest, including interest on overdues, as the actual town estimates are supposed to do.

TABLE 1 shows the time profile of collections and arrears ratios for a stable, repeating, annual lending program of Rs. 120. It assumes the loans are for one year, there is no default (default = uncollccti'ble debt), but the borrower is paying off in three equal annual installments, starting on the due date, what he should have paid altogether on that date. In this case the two year extension results in a stable 50 percent collection rate. In other words, the 50 percent collection rate is consistent with zero default.

FIGURE 1 shows the relation hewn collections and default rates assuming that the nonddaulters extend by two years as in Table 1. At zero default, the anre reaches 50 percent, as in Table 1. At 50 percent default, collection from the nondefaulters would be a stabk 15 percent (approximate) of dues.

TABLE 2 shows another time profile of collection and arrears ratios for a stabk, repeating program of Rs.120. It assumes the loans are for one year, 15 percent of the debt will never be repaid, and the rest (85 percent of Rs.120, or Rs.102) will be paid back in two equal annual installments starting on the due date. In this case the one year extension results in a stable 45 percent collection rate. Variants of the amortization profile, with repayments planned over several yeam and with grace periods allowed, yield similar results. For example, the new dues that should have been paid in year 5 are paid off in equal installments in years 5 and 6, and so forth for dues in other years, and the average delay is the same. The banks* money is overdue, on the average, one half a period. 'IU can be conceptualized by saying the average borrower is always one period late with half of his dues.

ANNEX 1C

&zmx Tablo 1: Rapayamnt of Lo- w a r Thrao Pariodr, Zero Default, Volunn of Bow Landing Comtmt

Start-up Period--> S t ~ b l o Poriod--* W i n d i n g Oovn Parid-->

Boginning Arroarr 0 80 120 120 120 120 120 120 120 40 Currant Dwr 120 120 120 120 120 120 120 120 0 0 Papmntr on Currant Dub. 40 40 40 40 40 40 40 40 0 0 Arroarr on Currant Drur 80 80 80 80 80 80 80 80 0 0 Paponto on Part -8 0 40 80 80 80 80 80 80 80 40 End-of-Porlod Arroarr 80 120 120 120 120 120 120 120 40 0

Collection rat io 33.32 40.02 50.02 50.02 50.02 50.02 50.02 50.02 66.72 100.02 Arraarr rat io 66.72 60.02 50.02 50.02 50.02 50.02 50.02 50.02 33.32 0.02

The tabla above arrumor t b t lo- mado in a given goat aro due tho following yoar, but are actually repaid mar a throo-gear poriod. A l l Intaroat payment8 aro arrumad to bo capitalized. The voluann of noor landing i r f i u d a t 120 oach p a r . The ..tablo poriod. ir tho intorerting poriod.

A n u u P-ro It 8.l.tiowhip Betwoon collection Rator rod Dofault Rator, bruming P a m n t r aro amdo &or Threo Period.

In tho graph abwo, vo arounn that paponto are st i l l mmdo in aqua1 inmtallmrntr w a r throo porioda, but m allav for tho porr ibi l l ty of dofault. Unpaid .mountr aro writton off in tho f i f t h poriod for any loan. Tho graph i l l t u t r a t a r tho collaction ratior arroclatod with variow lavolr of default.

m mmc Government of India f h Ministry of Finance

Sudha =&man rlilrf fkqm Department of Economic Afhirs Deputy Secretaw (w)

t h e June 11 srf M/NC\V Dclhi, ................................. 1.. I 9 9 3,

Dear Eir. Relson, !Bis is w i t h reference to the D,O, l e t t e r

dated d r g r i l 3, 1993 from Kr. Graham Donaldeon addressed to Mr, F,K, Sin&, AdiUtiobal Secretsry regarding oommente on d r d t Performance Audit Report under lPA,BlBD Credit Prod e c b I (LF. 2653-IF).

I ara forwarding herewith the commenta of F l S D on the draft Pezfonnance &dit Report f o r onward tranemiseion t o your headquartere.

Wit21 regards,

Yours sinc erely,

World Bank, 55, Lo& Eetate, srw Delhl- 1 1000 2.

Performance Audit Report - NABABD Credit ProJect I (Loan No.2653-IN) - Comments of NABARD ----------------------------------------- 1. DislllusiaamGnf =-

(para 1; page v)

Obviously, the World Bank has made the observation "recoveries

have not improved and the disillusionment with the NABARD

performance is now pervasive". while commenting about the poor

recovery performance of primary lending institutions. NABARD has

been exhorting the banks to institute the systems to improve the

recovery and also periodically advises them to correct the

discrepancies in their loan procedures and systems, which are

partly responsibile for the poor recovery. Recovery performance

is a reflection of various factors, external and internal to the

system and cannot be taken as an indication of disillusionment

with NABARD's performance.

2. -Ex- - (Para 6; page vii)

Ex-pas* analyses carried out by NABARD are an integral part of

the credit impact analysis system and are designed to assess

the realisation of project objectives including development of

micro level financial intermediaries and beneficiaries. Aspects

covered in ex-post analyses also cover, inter alia,

i ) resource augmentation of banks to promote development;

' ii) diversification of lending;

iii) improving quali ty of lending;

i v improving skills of bank staff in project formulation

and implementation; and

V ) improvements in credit delivery.

3. SustainabilitP (Para 9; page viii)

Qualitative objectives such as strengthening of rural credit

delivery system and quality of credit are long term phenomena

achievable in a phased manner. Strong internal and external

factors influence the operations of the financial intermediaries.

Appropriate strategies are being worked 'out keeping in view the

relevant feedback as also the ACRC and Narasimham Committee

recommendations on financial sector reforms relating to both

internal and external factors. These, NABARD feels, will have

very positive impact. Project sustainability has long-term

perspective.

4. i (Para 10; page ix)

NABARD periodically co'llects and analyses Demand, Collection and

Balance (DCB) data from banks to initiate appropriate action for

improvements. NABARD inspections of Cooperatives and RRBs assess

the realisability of loans/balances. These are followed up and

monitored. A further camputerised monitoring and information

system has been introduced by RBI in consultation with NABARD

under Service Area Approach to obtain data from rural financial

intermediaries. This covers the level and age of arrears in

various economic activities and sectoral investment credit

disbursed by banks. Banks will be re-designing their book-

keeping and back-up registers to make available the required

information. The system is getting stabilised. It is expected

that with these data it will be possible to monitor credit

dispensation and its realisability and ultimately productivity

more effectively.

5 . - (Para 10; page x)

Being an extension project, the project could not witness the

expected results in the limited time-frame available. However,

the concepts like building up of an effective banker-borrower

relationship, the systematic visit schedules for regular and

meaningful borrowers contacts, streamlining the internal systems

and procedures of lending institutions, equipping the field staff

with superior skills in appraising and monitoring the loan

operations, etc. helped to a large extent in translating the non-

cost project ideas into reality and enabled the banks in

internalising the project systems'and tools and improving quality

of loaning. Based on their experience in Pilot Project, several

banks have internalised the Pilot components after the formal

closure for which model guidelines were provided by NABARD and

many have extended the cost-free components to other areas. But . for the announcement of loan waiver, during the fag end of the

Project, which adversely affected the mentality of borrowers and

enthusiasm of the field functionaries, the impact of the Pilot

Project and its acceptability would have been even better. '

6 . NABdRD~ranramaac .- U C r d l t (para 1.9; page 5 read with foot note).

NABARD's refinance operations are viable and its lending rates

are fixed after taking into consideration the cost of funds.

NABARD has been conceived as an apex level development banking

institution for not only providing refinance for investment and

production credit to promote various developmental activities in

rural areas but also to perform central banking functions in

furtherance of rural development. Indian agriculture and rural

sector require special consideration by virtue of its susceptible

nature.. NABARD (unlike industrial sector where there is

multiplicity of institutions at the apex level such as IDBI,

IFCI, ICICI, etc.) is the only apex level development institution

in the field of rural finance/development. It m8.y not be

appropriate and desirable to measure NABARD's role purely on

commercial lines.

7 . of (para 2.3; page 9)

The various training programmes are designed by training

institutions of participating banks, Reserve Bank of India and

NABARD to cover multifarious aspacts of rural credit. In all

these programmes adequate number of sessions are invariably

incorporated to explain the need'for recovery of loans and

recycling of funds, repayment ethics and financial viability of

the banking institutions having poor recovery performance. Apart

from such regular sessions, a few programmas exclusively devoted

to discuss the various aspects of loan recovery and management of

. - 'defaults are also conducted in institutes viz. CAB, NBSC, etc.

8. On-lending - Partial Compliance a r m

(Para 2.10; page 12)

The ground water control and categorisation of area are done by

the State Ground Water Departments once every 3 years for ground

water assessment, based on collection of hydrological data and

refinements of ground water estimation norms. NABARD -denies

financing in dark area and cautions financing in grey area.

While considering the programme for ground water works, their

design, ,expected yield, pumping equipment capacity are reviewed

in consultation with the State Ground Water Departments, other

government agencies and financing agencies. The banks.: are

advised to strictly adhere to the (spacing, etc.,) norms. Any

violation of this is brought to the notice of the concerned

authorities of the district and the financing institution for

necessary corrective measures. The subsequent loan instalments

are released only if the case is recommended by the State Ground

Water ~epartment. Special Monitoring Studies are conducted by

NABARD to monitor the programme implementation. As there had

been certain deviations from these directives, the banks are now

exercising more stringent controls in financing ground water

works. It would thus be seen that NABARD itself has strictly

adhered to the technical parameters, supervised and monitored MI

programmes not only under NBCP I but otherwise also.

9 . - (Para 3.1; page 13)

Both the considerations viz., Study and Debt-waiver Scheme are

external to NABARD. Most of the important recommendations of the

ACRC within the purview.of NABARD have been acted upon by NABARD.

As regards Debt Waiver Scheme, the PAR has reached the conclusion

that the Ministry of Finance, RBI and NABARD were firm and with

the next change in government, their efforts were re-inforced.

(Please see PAR para 4.25; page 28)

10, IRDP Weaknesses - Government to recognise the welfare character of IRDP and separate it from

(Para 3.6; page 15/16)

IRDP is essentially an anti-poverty programme with the objective

of increasing the family income of the families below the poverty

line by providing them income generating assets by way of subsidy

and credit to enable them to take up economic activities, which

will help them to cross the poverty line on a lasting basis.

All the individual investments financed under IRDP are viable

propositions. The viability of the ultimate lending rates is

reviewed periodically by Reserve Bank of India/Government of

India and there have been recent upward revision in these rates.

The rates are linked to the size of loans (upto Rs.25,000/- 8

12.0%) and not on the purposes/catepory of borrowers. Further,

with the inflation rate having come down to around 6% and the

minimum interest rate on loans having gone up to 12%. this rate

can no longer be considered as concessional.

11. The commercial banks IRDP portfolio - Much less M (Para 4.5; page 19/20)

NABARD has been initiating necessary policy measures, providing

timely assistance and guidance to the financial institutions,

simplifying the procedure and strengthening the monitoring

mechanism at the grass root level/ground level for IRDP. To

build up a professional cadre and to give a professional touch,

necessary operational infrastructure for monitoring the scheme

and providing positive direction to the programme, NABARD has set

up a task force comprising members from the participating banks,

Reserve Bank of India, Government of India and State Governments

to initiate policy measures for quality improvement in lending

under IRDP. besides Planning and Review Group in each Regional

Offices of NABARD and IRDP Cell at Head Office of NABARD. To have

a detailed professional appraisal of each loan involving small

amounts or large number under IRDP will be very costly and

perhaps, not desirable. However, to take care of important

requirements of sound appraisal system, NABARD, in consultation

with the banks, have prepared activity-wise unit cost norms,

economics and technical parameters. These are circulated among

the banks for taking into account while sanctioning individual

loans. Apart from this task force, the consultative arrangements

for credit to IRDP at various levels are as under.

i) High Level Committee on Credit (HLCC) at Government of

India level;

ii State Level Bankers Committee (SLBC);-

iii) District Level Consultative Committee (DLCC);

iv) Block Level Consultative Committee- (BLCC); and

V) Block Level Bankers Committee (BLBC).

It may not be always correct to say that commercial banks have

given much less professional attention to IRDP portfolio.

12. Rehabilitation of Cooperatives - to prowed -its

.(Para 3.8; page 16)

NABARD devised the required packages for revitalisinn the weak

cooperatives and to nurture them to health. The 15 h i n t

programme for development of PACS and LAMPS initiated under pilot

programme, the 10 Point and 12 Point programmes for

rehabilitation of weak PLDBs, SLDBs, etc., were some of the

packages developed by NABARD for cooperatives. As cooperation is

a State subject, any initiative to bring them back to the right

track requires the support, both financial and logistic from the

State Government side. Reluctance of the State Governments . t o

undertake financial commitment devolving on them because of

budgetary constraints was one of the major contributory factors

which adversely affected the successful implementation of the

rehabilitation programmes. Further, the Government of India has

accapted and circulated the recommendations of Ardhanareeswaran

Committee and Brahmprakash Committee on democratisation,

depoliticisation as well as professionalisation of co-operatives.

It is hoped that the implementation of these recommendations by

the State Governments will substantially improve the working of

co-operatives.

13. TheLDBs' P r o b l l - (Para 3 , 8 ; page 16/17)

To tackle this problem, the Government of India had appointed a

Committee under the Chairmanship of Mr. Brahmprakash Chowdhry to . suggest suitable legislation for depoliticisation of the

cooperatives as also non-intervention by the State Governments in

thm cooperatives' functioning. The Committee's report has been

accepted by Government of India and circulated to the State

Governments for acceptance and implementation.

14. On-lending Programme and delinquency perpetuate - (Para 3.10; page 17)

The needed reform objectives regarding strengthening of the

credit delivery system have been partially implemented/

introduced. Such reforms require a long-term strategy to be

implemented in a phased manner for which a blueprint has already

been made available under ACRC and Narasimham Committee

recommendations. It would rather be premature to conclude that

the proJect is a failure.

15. NABARD Financial Strength dependent

(Page 4.7; page 21)

NABARD's lending pattern depends upon its resource structure and

the rates of interest on its refinance change according to the

cost of resources. Keeping in view the administered interest

rater at the ground level and the need for much larger flow of

credit to agricul'ture (due to present low level of private

capital formation), particularly to certain priority/neglected

sectors and areas, the support by way of concessional refinance

by NABARD may have to be continued. This necessitates receipt of

funds at lower cost by NABARD.

16, D e l i n a u e n c v ~ ' I (Para 4.9; page 22)

The system of Demand, Collection and Balance (DCB), in vome, is

a good instrument for assessing trends in recovery. NABARD does

not agree with the statement that its net-work does not provide

accurate measures for the bad debts of client banks. NABARD has

issued detailed guideline envisaging case by case analysis of

realisability of all the assets to assess the bad and doubtful

debts/assets. Further, during the statutory inspection, NABARD

assesses the bad and doubtful debts with a view to arriving at

the net worth of the client banks' owned funds. It may not be out

of place to mention that system of working out overdues based on

demand as practiced for rural lending in India is more

spientific than based on outstanding as practiced in other

sectors/countries. This, however, generally gives higher figure

of overdue percentage.

17, Production Data too w e a k to .

(Para 4.37; page 34)

NABARD estimated the impact of NABARD Credit Project I on the

basis of data on physical units as available from its Regional

Officesand the impact estimates as available fro'm the evaluation

studies undertaken by NABARD and client banks during currency of

the Project. A cross-section of investments, the sample

estimates available from evaluation studies undertaken by NABARD

and the client banks, proved useful in generating the estimates

in respect of the population (total units financed) since the

studies are undertaken in a scientific manner covering a fairly a

large sample.

With a view to improving the data base on physical achievements - and enlarging the coverage of evaluation studies to estimate the

impact of the investments in terms of additional production,

income and employment, NABARD has been impressing upon the

participating banks to collect and furnish the necessary

information.

The available evidence however, does not support the argument

that increased production has depressed the crop pricea

especially of the foodgrains.

.18. (Para 4.37 (3); page 35)

It may not be right to conclude that "15% would be a reasonable

upper estimate of the actual default parameter in the formal

credit system". An analysis of the loan outstanding vis-a-vis

bad debts in regard to DCCBs in 10 States revealed that the

average percentage of bad debts as a percentage to loan

outstanding works out to around 5%. However, NABARD endorses the

observation that more analysis is required to determine the real

level of default and how destructive it is.

19. Data on Collections and Overdues - Need oun#nn svst-

(Para 4..37(4); page 35)

Reserve Bank of India has alreadys issued' guidelines for

commercial banks on income recognition, assets classification,

provisioning requirements and capital adequacy norms in

accordance with the international practice and the the Basle '

Committee's recommendations.

20. Debt H d x e ~ (Para 4.37 (5); page 35)

NABARD has assigned an in-depth study on the impact of the ARDR

scheme on rural credit system to NIBM, Pune. While undertaking

the study, the following major aspects are being taken into

consideration: i) impact of the scheme on the behaviour of bank

clients and credit institutions;

ii) lessons for future with regard to the implications of such

measures in creating a suitable climate for recovery of loans and

attitudes of rural bank clients and bankers; and

iii) the present environment reflected in the recommendation of

the Narssimharn .Committee report.

21. Releasing the Choke of - (Para 4.36(6); page 36)

This aspect will be covered in the NIBM study as mentioned at

para 20 above.

22. (Para 4.37 (8); page 36)

As a part of the structural adjustments in the economy of the

country. Government of India has embarked on a series of

financial sector reforms, which include reforms in the

agricultural credit system also.

ACRC

CAB

CRR

DCB

DCCBs

ICICI

IDBI

IFCI

LAMPS

LDB

NBSC

NIBH

PACS

RRB

SLR

: Agricultural Credit Review Committee

; College of Agricultural Banking

; Cash Reserve Ratio

; Demand, Collection and Balance

: District Central Cooperative Banks

: Industrial Credit and Investment Corporation of India Ltd

; Industrial Development Bank of India

: Industrial Finance Corporation of India Ltd.

; Large-size Adivasl Multi-Purpose Societies

; Land Development Bank

: National Bank Staff College

; National Institute of Bank Management

: Primary Agricultural Credit Societies

: Regional Rural Bank

; Statutory Liquidity Ratio

d BOMB@ ha ~vunocjltr*

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7 T.W.

I

L

6 u ~ DnriD a J;? 1993 FAX MESSAGS NO.-

.Fl{C>?*I r P.V.A.. RAPA RAO, COPSI NkRARD, BCMSAY

F C R 8 MR. G R W M DONALDSmr CHISF. AGRICULTVRZ AH3 HUN DW&LCPJ-!ZNr PIVISIQT, O W , WORIeD FANK, W A J I I I N G 9 ~ ~ DC - 204 33 FiOt NC. ( 2 0 2 ) 676-0555

1 !

PL:;.'\SE REFER TO OUR: FAX MLSSXGO NO. 620 DATGD 31 M Y 1993

! i I T i i TIlZ F I N D I N G S OF THE P?L~(.) CUR INITIAL Rd,\CTIUfStX a9Vt

OF TliE FIN3INGS AR2 AS UNDER a

1, i pRCtDuWION m'P4 - NAB?.RD .4GR?ES WITH THE NEED FOR I ~ ~ R C V I N Q I

THC DATA BASS WIT-l: THZ WORLD BANK PRCVIDING SUPPORT(.) I

1 THAT THE LTVL% OF 1RRZCGVZR;IBLE DEBT IS AROUND 15X(, I I

HC!W.ZVL'Ro NABARP ENDORSCS TH2 0BS::WATIGNS THAT MDR.2 QRITICAL

ANALYSIS IS REQUIRED TO DST3WZNL THd RFAL L L V ~ L OF CEF.\VLT

AND HCW DESTRUCTIVZ IT IS ( * ) I

3. ,DkT;< ON a L S C l ' I O N & WdRDVES - N32D FOR 1MPXCVLMi;::h'T 'IN

ACCOONTING SYST-CH - RBI K4S ALRISADY f3SUBD G U T D G ' ~ I N S ~ FOR

C ~ ~ E R C Z A L B-XS ON I N Z O W RZCOGN1TIONe ASSETS L ~ A S S ~ F I * i

CitTI CN, P R ~ I S I O N ~ ~ ~ ~ R ~ Q U I . U M : .NTS AND CWITAL mEWA7

4 DEBT W A N L R ; .r RZLEASINO CHOKE ON C)GIONIC INDEBTLDSSSS - . HABARD m s ASSIGHSD AN IN-DEPTH s n p ~ ON THE IMP~~CT OF

ARDR SCH?&E: ON Rum& CRZDIT SYSTiC 'It3 T H E NATION:&

INSTXTUTZ OI) BANK M4l.!AGEMENT (NIBM) , PUNE (. ) mE. STUDY

WI1.L B R W L CCVZR TI35 YAJCR ASPECTS OF ARDR SL31:-:bIG r 5.. NEED FOR R3F'ORM - IT MAY NOT 82 RIGHT TO SAY TIIAT GO1

! WAS NC;T SiGRIWS CNGUGH TO TRY R23OLUTiLY 1'0 n3MW4 THC

I

MAIN CONBTRA~NTS~.) GWT. HAS TASUlJ VARIOUS ST3P!j TO

IMPLEMENT ' ~ d $ ~ b RLCOMMiEkQATXON WIUI INCLUDES THI:: k J O R !

PAR TO MS A~.sc/~JAE&S&~AM C O I ~ I ~ E E RZCO~%%DAT~ DN 4, I f<ZbUCTION IN STATUTORY LIQUID1 TY RAT1 0 (sLR) R!ii;3UI RLNPI T

Abiu CASH RBSSRVS RATIO (cRR), G U f DELINSS FCR TRANSP.4RdNCY

OF AOCOUN TS +D CAPITAL ADE2UACY NORMS TO BANKS ( . ) !

MODEL LEGISLA?'ICN IS UNDER CONSIDERATICN OF G C I TO STCP

POLITICAL INTFRFERi3NCE IN T H E FUNCTIONING OF 'PHs

world bank document · ing causes of delinquency were not maidy attributable to weather. a...

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