188 14 FINANCE FOR THE SMALL COMMERCIAL FARMER
commercial bank, the branch in effect serving as a local agent for the bank. All
banks are eager to increase deposits.
The third means is lending to the rural non-farm sector as farm incomes drive
rapid expansion of that sector. Credit is not initially the constraint in that sector
but as it grows, and particularly as opportunity arises to serve a large market for
the more sophisticated small enterprises, credit for the system from small com-
mercial farmers could logically expand into that area.
The Loan Officer The second essential is a specialized, technically competent,
loan officer at the branch level to ensure a large and growing volume of profitable
loans that are repaid in full and on time. This is a key position in the system. It is
here that sound loans are made, that repayment is ensured, and that loan growth
is rapid. That officer must be trained at a high level in technical agriculture as well
as being experienced in agriculture. A period of service in the extension service is
a logical recruiting ground and loan officers need training in accounting, farm
budgeting, and lending rules. The loan officer works closely with the local Board
and is well paid relative to extension workers.
A survey for the Reserve Bank of India’s analysis of overdue loans (which I was
involved with) showed that farmers see those overdues as debts that must be
paid—a moral responsibility—but they “somehow never get around to it!” The
evidence is also clear that even in situations where such overdues are substantial,
farmers who have substantially profited from a loan are most likely to repay on
time. The loan officer ensures that there is a profitable farm plan for use of the
loan proceeds and then follows up regularly to ensure on-time repayment.
The question often arises of lending for consumption, especially including
maintaining consumption in a difficult time. The studies generally show con-
sumption loans make up about half of all rural lending. The loan officer’s task is
to ensure that the loan generates income to allow its full repayment. That the
proceeds are in fact fungible—they can be diverted to other purposes—is irrel-
evant if a plan is implemented that is profitable enough for repayment.
The problem with repayment is most likely to arise in unexpected circum-
stances: two bad crop years in a row, illness or a death in the family, a completely
unexpected degree of price decline. In those circumstances the loan needs to be
rescheduled and stretched out over a longer period. That is an important
function of a loan officer.
What if there are three bad crop years in a row? Fortunately, that is uncom-
mon. It is destabilizing to the system that is specialized in agriculture for good
reason and hence is not diversified across other sectors. That is when govern-
ments inevitably step in, as they do in general banking failures. That has been the
tradition in the United States and is in effect a form of government subsidized
insurance. The loan officer attempts to minimize the extent of this government
assistance and it should occur infrequently. Governments are tempted to gain
political support by forgiving loans. That is, of course, destructive to the essential
discipline of a viable system. Loan refinancing is the correct route.
, A SPECIALIZED FINANCIAL INSTITUTION FOR THE SMALL COMMERCIAL... 189
The huge number of trained loan officers required poses an important prob-
lem that is met by rapid expansion of the agricultural universities. During the
period of rapid expansion of the national rural financial system in India, that
system was easily the single most important job destination for graduates of those
institutions. The social objective of more people participating in higher educa-
tion is assisted by the large demand for trained agriculturalists for a growing
agricultural finance system. In the short run, since the financial system likely
follows by some years the extension system, the best of the extension agents can
be given special training in finance and become loan officers.
A Community Level Board The third essential feature is a local board of knowl-
edgeable farmers, farmers’ wives, and female-headed households to ensure
sound loans and full repayment, not by personal guarantees but by proper
selection and oversight. It is not usual for small commercial farmers to guarantee
each other’s loans as is the practice in micro-credit. The loans are too large
relative to incomes reinforced by a business attitude of focusing on one’s own
business and not that of others. It is for the loan officer to do that. However, a
group of respected farmers and farmers’ wives on an elected board can ensure
that repayable loans are made and apply social pressure to ensure that the branch
is solvent so that lending can continue. The board brings local knowledge of
farms and farmers that can supplement the intensive work of the loan officer and
bring stability to the branch.
There are two reasons why it is essential to have substantial women’s repre-
sentation on such a board. First, women, in survey after survey, prove to be more
committed to repaying loans than men. That attitude is important to a board.
Second, women bring somewhat different specialized knowledge about both
farming and the farmers applying for loans. Third, it is important not to have a
bias against female-headed households, particularly since they tend to be on
average lower income than male-headed households, and they face greater
difficulties.
The pool of female-headed households tends to be low so farmers’ wives are
also logical board members. Women tend to be underrepresented on such
boards partly because of nascent prejudice but more because they tend not to
be included in the dissemination of knowledge about the new, technically-based
agriculture. Experience on such a board is a logical stepping stone to other
positions of influence.
An Apex Body The fourth essential is an apex body to raise funds for the
branches to lend, manage sophisticated accounting and analysis, spot problems
at a branch and rectify them, and set policy for the system. Large countries will
probably have two levels: an appropriate number of unions to manage the
branches and an overall apex at the national level, with an appropriate division
of labor between them.
It is most efficient to manage the accounting at the apex level. The advent of
the cell phone facilitates this—leaving the loan officer at the branch to primarily
commercial bank, the branch in effect serving as a local agent for the bank. All
banks are eager to increase deposits.
The third means is lending to the rural non-farm sector as farm incomes drive
rapid expansion of that sector. Credit is not initially the constraint in that sector
but as it grows, and particularly as opportunity arises to serve a large market for
the more sophisticated small enterprises, credit for the system from small com-
mercial farmers could logically expand into that area.
The Loan Officer The second essential is a specialized, technically competent,
loan officer at the branch level to ensure a large and growing volume of profitable
loans that are repaid in full and on time. This is a key position in the system. It is
here that sound loans are made, that repayment is ensured, and that loan growth
is rapid. That officer must be trained at a high level in technical agriculture as well
as being experienced in agriculture. A period of service in the extension service is
a logical recruiting ground and loan officers need training in accounting, farm
budgeting, and lending rules. The loan officer works closely with the local Board
and is well paid relative to extension workers.
A survey for the Reserve Bank of India’s analysis of overdue loans (which I was
involved with) showed that farmers see those overdues as debts that must be
paid—a moral responsibility—but they “somehow never get around to it!” The
evidence is also clear that even in situations where such overdues are substantial,
farmers who have substantially profited from a loan are most likely to repay on
time. The loan officer ensures that there is a profitable farm plan for use of the
loan proceeds and then follows up regularly to ensure on-time repayment.
The question often arises of lending for consumption, especially including
maintaining consumption in a difficult time. The studies generally show con-
sumption loans make up about half of all rural lending. The loan officer’s task is
to ensure that the loan generates income to allow its full repayment. That the
proceeds are in fact fungible—they can be diverted to other purposes—is irrel-
evant if a plan is implemented that is profitable enough for repayment.
The problem with repayment is most likely to arise in unexpected circum-
stances: two bad crop years in a row, illness or a death in the family, a completely
unexpected degree of price decline. In those circumstances the loan needs to be
rescheduled and stretched out over a longer period. That is an important
function of a loan officer.
What if there are three bad crop years in a row? Fortunately, that is uncom-
mon. It is destabilizing to the system that is specialized in agriculture for good
reason and hence is not diversified across other sectors. That is when govern-
ments inevitably step in, as they do in general banking failures. That has been the
tradition in the United States and is in effect a form of government subsidized
insurance. The loan officer attempts to minimize the extent of this government
assistance and it should occur infrequently. Governments are tempted to gain
political support by forgiving loans. That is, of course, destructive to the essential
discipline of a viable system. Loan refinancing is the correct route.
, A SPECIALIZED FINANCIAL INSTITUTION FOR THE SMALL COMMERCIAL... 189
The huge number of trained loan officers required poses an important prob-
lem that is met by rapid expansion of the agricultural universities. During the
period of rapid expansion of the national rural financial system in India, that
system was easily the single most important job destination for graduates of those
institutions. The social objective of more people participating in higher educa-
tion is assisted by the large demand for trained agriculturalists for a growing
agricultural finance system. In the short run, since the financial system likely
follows by some years the extension system, the best of the extension agents can
be given special training in finance and become loan officers.
A Community Level Board The third essential feature is a local board of knowl-
edgeable farmers, farmers’ wives, and female-headed households to ensure
sound loans and full repayment, not by personal guarantees but by proper
selection and oversight. It is not usual for small commercial farmers to guarantee
each other’s loans as is the practice in micro-credit. The loans are too large
relative to incomes reinforced by a business attitude of focusing on one’s own
business and not that of others. It is for the loan officer to do that. However, a
group of respected farmers and farmers’ wives on an elected board can ensure
that repayable loans are made and apply social pressure to ensure that the branch
is solvent so that lending can continue. The board brings local knowledge of
farms and farmers that can supplement the intensive work of the loan officer and
bring stability to the branch.
There are two reasons why it is essential to have substantial women’s repre-
sentation on such a board. First, women, in survey after survey, prove to be more
committed to repaying loans than men. That attitude is important to a board.
Second, women bring somewhat different specialized knowledge about both
farming and the farmers applying for loans. Third, it is important not to have a
bias against female-headed households, particularly since they tend to be on
average lower income than male-headed households, and they face greater
difficulties.
The pool of female-headed households tends to be low so farmers’ wives are
also logical board members. Women tend to be underrepresented on such
boards partly because of nascent prejudice but more because they tend not to
be included in the dissemination of knowledge about the new, technically-based
agriculture. Experience on such a board is a logical stepping stone to other
positions of influence.
An Apex Body The fourth essential is an apex body to raise funds for the
branches to lend, manage sophisticated accounting and analysis, spot problems
at a branch and rectify them, and set policy for the system. Large countries will
probably have two levels: an appropriate number of unions to manage the
branches and an overall apex at the national level, with an appropriate division
of labor between them.
It is most efficient to manage the accounting at the apex level. The advent of
the cell phone facilitates this—leaving the loan officer at the branch to primarily
