Role of NGOs in Credit and Savings

The Rural Development Trust (RDT)is a credit programme of Action Aid(AA)India which carries out an irrigation development project in the district of Ananthapur, India.

The RDT provides agricultural loans to small and marginal farmers.

The RDT is designed on the lines of a revolving fund. The fund initially received an annual grant from AA, to be used towards members’ contributions to the fund. Under the scheme AA provides funding on an annual basis for a number of 4 to 6 years from the inception.

This forms the working capital of the scheme which is continually supplemented by annual grants from AA, recovery of loans and mobilisation of savings of members.

Small sized loans were disbursed at lower interest rates than the banks for agricultural purposes. The loans do not require collateral but are covered by a group guarantee. When a loan is not covered by a group guarantee, it becomes linked to the crop life cycle which determines and ensures repayment.

Five years after the inception of the credit programme, the Community Credit Fund(CCF)popularly known as the ’Crop Loan’ was initiated with the aim of building an optimum size of credit in a phased manner. Cash contributions of the members were invited on the understanding that the AA would make an equal contribution to every cash deposit to the fund as an incentive.

The CCF was thus created with contributions of the members and the funders’ equal shares. Also added were loan repayments from the revolving capital.

In addition savings schemes within groups, especially women’s groups, were also implemented. Members agree to save a certain amount monthly and in addition seasonal savings are also organised and credited to the working capital.

In one year of setting up the CCF, 2 consecutive droughts resulted in crop failure and a sharp decline in the income rates of the target group. This hampered the members’ ability to make substantial contributions to the CCF and the AA contribution was raised from an equal share of the members’ contribution to 3 times the share of every contributionin order to keep the CCF in operation. At this time, where the members’ contribution remained at Rs.50, the AA contribution was made Rs.200).

Simultaneously a drought relief scheme was implemented where the target population was motivated to work on the land and were paid wages by the AA.The members’ contribution to the credit fund was deducted from the wages as well as old dues. With this scheme the number of beneficiaries increased.

In four years, the successful harvests and good market prices enabled the contribution of the AA and its members to be made in equal portions. But poor rainfall subsequently resulted in poor loan recovery. On the original plan the next year AA’s contribution was to be reduced by 25% annually in relation to the members’ share. But this affected loan repayments and the coverage ofmembers reduced drastically as members could not take fresh loans until the previous loan was repaid in full. of 7715 farmers who received loans, four years later only 1667 were eligible for fresh loans and as a result 78% of the members dropped out of the scheme. This not only hampered the sustainability of the credit scheme but also destroyed the group system which was the foundation for other programmes as well.

The coverage of members was reduced drastically and the rate of the average loan has increased and following AA principles, the credit scheme has been withdrawn.

The failure of this scheme shows that this model cannot be sustained in drought prone regions. As the loans given are for agricultural purposes, income from harvest cannot be depended upon, as the sucess of the crop rests wholly on the weather. Further, defaulting farmers are not eligible for fresh loans until their previous loans are settled in full. Faced with no choice, the farmers continue to borrow from money lenders.

Also the fact that the interest charged on the agricultural loans is lower than the bank rates has caused the depletion of capital and added to the mounting defaults that have proven the programme unworkable.