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Restructuring Rural Financial Institutions

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  • Basu Shyamal K
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    Abstract

    This paper first identifies major proposals being considered now for restructuring rural financial institutions (RFIs). It then discusses main reasons which may have prompted these proposals. These are (1) inefficiencies of multi-agency approach, (2) dependency of RFIs, (3) autonomy of RFIs (in regard to reserve requirements, priority sector lending, loan appraisal, monitoring and recovery, and interest rates), and (4) explicit and implicit viability of RFIs. Various proposals are evaluated to find out whether they are suitable or not and if not, what alternatives are required to tackle the problems of RFIs. Based on this the paper shows that neither the upward revision in lending rates nor these restructuring proposals are required for improving viability of RFIs. An alternative proposal of restructuring RFIs is then suggested. This proposal discusses six strategic organizational principles of developing RFIs. These are (1) encouraging multiple institutions, (2) promoting appropriate forms of organization, (3) achieving vertically integrated organizational structure, (4) developing suitable density of field-offices, (5) enlarging reach or coverage of rural clients, and (6) accelerating diversified and multiple functions. Both systemic and procedural macro and micro innovations that stress the process aspect of institutional development are outlined. This restructuring proposal emphasizes the mission of decentralized institutional development of RFIs. Its vision is diversified, multiple and joint-products oriented rural banking that is autonomous but accountable. And it has a potential to make RFIs more viable and agricultural and rural growth-oriented.

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    Bibliographic Info

    Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number WP1994-07-01_01275.

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    Handle: RePEc:iim:iimawp:wp01275

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