A formal financial system for providing rural credit in Bangladesh started with the establishment of the Agricultural Development Bank in 1960s. Later the government also encouraged commercial banks to set up branches in rural areas for financial inclusion. In 1977, a special agricultural credit programme called 'Matir Dak' was launched. As a result, the number of bank branches in rural areas increased from 854 in 1975/76 to 3,225 in 1983/84. The rural branches were engaged both in collection of savings and provision of credit.
However, on a close scrutiny, it was observed that the access to finance was provided mostly to large and medium landowning households and big traders and fishermen. The landless and marginal farmers remained excluded from the market. A survey conducted in 1982, jointly by the International Food Policy Research Institute (IFPRI) and the Bangladesh Institute of Development Studies (BIDS), revealed that 62 per cent of rural households, most of them being smaller landowning groups, obtained loans from informal sources. Only 14 per cent of rural households could access loan from financial institutions that contributed to 25 per cent of total loans received by rural households.
The recovery of loans from the financial institutions was very poor, and the transaction cost of the loans was high due to small size of loans. Many financial institutions, however, showed fictitious record of good recovery by re-scheduling the overdue loans into current loans and even showed profits in the books by charging interest on overdue loans. To control this phenomenon, the Bangladesh Bank introduced a policy of classification of loans according to the recovery rate and keeping provision for loan loss according to quality of loan portfolio. As rural branches started accumulating losses, many commercial banks closed loss-making rural branches from the mid-1980s.
According to the critics, the history of the government's involvement in extending agricultural credit to rural households is a history of frustrations and wasteful endeavours. The loan recovery rate against outstanding loans averaged 22 per cent from 1998-2010. The annual rate of increase in disbursement averaged 17 per cent and the annual rate of repayment averaged 12 per cent. This gap between rates of disbursement and repayment resulted in accumulation of outstanding loans.
A World Bank study reports that the importance of banks and cooperatives in rural lending has declined over time while the importance of MFIs (micro-finance institutions) has increased.
Recently some qualitative changes have been introduced in credit delivery system that contributed to improvement in credit business targeted for farmers and small enterprises. The monitoring cell of the central bank has been strengthened for ensuring transparency in credit business and reducing the transaction cost for obtaining credit by borrowers. Priority is given to credit support for women in agriculture to increase women's participation in economic activities. Emphasis has been laid on development of marketing facilities for agricultural products to ensure fair price.
Priority has been given to reach credit to relatively impoverished and neglected regions such as char (island), haor and coastal areas. The central bank has made it mandatory for the state-owned commercial banks as well as the private and foreign banks to allocate at least two per cent of their loan portfolio for agriculture.
Recently, the Bangladesh Bank has issued a directive to commercial banks to disburse agricultural loan openly in presence of local representatives from union, concerned agricultural officers, teachers and other respected persons to ensure transparency. Another innovative step towards financial inclusion is the opening of bank account by all farmers at a minimal charge of Tk.10 (12 cent) so that credit, subsidies and other government transfer could be directly deposited to the farmers' accounts. This has helped reduce leakages in the implementation of the government's agricultural subsidy and the 'safety net' programme. The Bangladesh Bank has brought 13.2 million people under banking service that includes farmers, hardcore poor, and the unemployed youth.
The most important player in the rural credit market is the microfinance industry that has grown vastly in size and services. A review of the microfinance industry conducted by the experts for the 10 largest MFIs (with a membership of over 200,000) revealed the following:
* There is a high concentration in the microfinance market. Three largest MFIs, Grameen Bank, BRAC and ASA accounted for about 70 per cent of the microfinance portfolio, and the 10 largest accounted for 87 per cent.
* The average loan balance per borrower has increased from US$71 per borrower in 2005 to US$ 115 in 2009, about 20 per cent of the per capita gross national income.
* The products include not only credit but also savings and micro-insurance. About 40 per cent of the MFIs provide insurance for various purposes, including exemption of outstanding loan when the borrower accidentally passes away, funeral expenses, and for major health hazards such as accidents and death of livestock.
* The efficiency in loan operation is very low. The cost of operation is about 14.6 per cent of the outstanding loan, compared to 17 per cent in Asia and 20 per cent at the global level.
* The average yield (income from service charge) is about 23 per cent compared to a 27 per cent interest rate cap introduced by the Micro-credit Regulatory Authority. With a cost of loan fund of about 9.4 per cent, the cost of servicing the loan at 12 per cent, and a provision for bad debt of about 3.0 per cent, the MFIs were able to make some surplus in the credit business. The surplus is accumulated as retained earnings which is an important source of loan fund.
* The portfolio quality is not so impressive compared to international standard. The portfolio at risk (overdue loans for over a month) was about 6.6 per cent for the top three MFIs and about 4.9 per cent for the others.
The writer is a Professor of Economics at Jahangirnagar University.
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