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Document o f The World Bank
FOR OFFICIAL USE ONLY
Report No: 38774-IN
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED LOAN
IN THE AMOUNT OF US$300 MILLION
AND A
PROPOSED CREDIT
IN THE AMOUNT OF SDR 196.8 MILLION (US$300 MILLION EQUIVALENT)
TO THE REPUBLIC OF INDIA
FOR A
STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
May 3 1,2007
South Asia Finance and Private Sector Development
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
(Exchange Rate Effective April 30,2007)
ADB APL BR Act C A CAS CCB ccs C F I CRAR CSA cvc DAP D C C B DCRR DEA DFID D L I C DPL ESW FM FRS GDP Go1 GTZ HR IBRD I C R I C B IDA IEG IM IRR IT
Currency Unit = Indian Rupees (Rs) Rs41.29 = US$1
US$1.524 = SDR 1
FISCAL YEAR April 1 - M a c h 3 1
ABBREVIATIONS AND ACRONYMS
Asian Development Bank Adaptable Program Loan Banking Regulation Act Chartered Accountant Country Strategy Credit Cooperative Bank (including SCB, DCCB, PACS) Credit Cooperative System Cooperative Financial Institution Capital to Risk-weighted Assets Ratio Cooperative Societies Act Central Vigilance Commission o f India Development Action Plan District Central Cooperative Bank Department for Cooperative Reform and Revival Department o f Economic Affairs Department for International Development, UK District-level Implementation Committee Development Policy Loan Economic and Sector Work Financial Management Financial Restructuring Support Gross Domestic Product Government o f India Deutsche Gesellschaft fur Technische Zusammenarbeit Human Resources International Bank for Reconstruction and Development Implementation Completion Report International Competitive Bidding International Development Association Independent Evaluation Group (of the Wor ld Bank) Implementation Manual Internal Rate o f Return Information Technology
KfW M&E MFI MIS M o F M o U MTR NABARD N C B N I C S I NIMC NPL NPV PACS PIE PS
RBI RCS RDA RFI RRB RTI S A SCB S IDBI S I L SLIC SLR SWAP TA UCBs UPA V S L
QAG
FOR OFFICIAL USE ONLY Kreditanstalt fur Wiederaujbau Bankengruppe Monitoring and Evaluation Micro finance Institution Management Information System Ministry o f Finance Memorandum o f Understanding Mid-Term Review National Bank for Agriculture and Rural Development National Competitive Bidding National Informatics Center Services Inc. National Implementation and Monitoring Committee Non-performing Loan Net Present Value Primary Agricultural Credit Societies Project Implementing Entity Participating States Quality Assurance Group (of the World Bank) Reserve Bank o f India Registrar o f Cooperative Societies Return on Assets Rural Finance Institution Regional Rural Bank Right to Information Special Audit State Cooperative Bank Small Industries Development Bank o f India Specific Investment Loan State-level Implementation Committee Statutory Liquidity Ratio Sector-wide Approach Technical Assistance Urban Cooperative Banks United Progressive Alliance Variable Spread Loan
Vice President: Praful C. Pate1 Country Director: Isabel Guerrero
Sr. Country Manager: Fayez Omar
Task Team Leader: Priya Basu Sector Directorhlanager: Sadiq Ahmed/Simon Bell
This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.
INDIA: PROJECT ON STRENGTHENING RURAL CREDIT COOPERATIVES
CONTENTS
Page
A . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1 . Country and sector issues ....................................................................................................... 1 2 . Rationale for Bank involvement ............................................................................................ 7 3 . Higher level objectives to which the project contributes ....................................................... 7
B . PROJECT DESCRIPTION ................................................................................................. 7 1 . Lending instrument ................................................................................................................. 7 2 . Project development objective and key indicators .................................................................. 8 3 . Project components ................................................................................................................. 8
5 . Alternatives considered and reasons for rejection ................................................................ 12 4 . Lessons learned and reflected in the project design .............................................................. 11
C . IMPLEMENTATION ........................................................................................................ 13 1 . Partnership arrangements ...................................................................................................... 13
2 . Institutional and implementation arrangements .................................................................... 13
3 . Monitoring and evaluation o f outcomes/results .................................................................... 15
4 . Sustainability ......................................................................................................................... 16 5 . Critical r isks and possible controversial aspects ................................................................... 16
6 . Loadcredit conditions and covenants ................................................................................... 19
. . .
D . APPRAISAL SUMMARY ................................................................................................. 20 1 . Economic and financial analyses .......................................................................................... 20
2 . Technical ............................................................................................................................... 22
3 . Fiduciary ............................................................................................................................... 22
4 . Social ..................................................................................................................................... 23 5 . Environment .......................................................................................................................... 24
6 . Safeguard policies ................................................................................................................. 24
7 . Policy Exceptions and Readiness .......................................................................................... 24
Annex 1: Country and Sector or Program Background ......................................................... 25
Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 37
Annex 3: Results Framework and Monitoring ........................................................................ 39
Annex 4: Detailed Project Description ...................................................................................... 46
Annex 5: Project Costs ............................................................................................................... 52
Annex 6: Implementation Arrangements ................................................................................. 53
Annex 7: Financial Management and Disbursement Arrangements ..................................... 58
Annex 8: Procurement Arrangements ...................................................................................... 68
Annex 9: Economic and Financial Analysis ............................................................................. 73
Annex 10: Safeguard Policy Issues ............................................................................................ 85
Annex 11: Project Preparation and Supervision ..................................................................... 87
Annex 12: Documents in the Project File ................................................................................. 89
Annex 13: Statement of Loans and Credits .............................................................................. 92
Annex 14: Country at a Glance ................................................................................................. 96
INDIA: PROJECT ON STRENGTHENING RURAL CREDIT COOPERATIVES
Source
PROJECT APPRAISAL DOCUMENT
Local Foreign Total
SOUTH A S I A REGION
BORROWER/RECIPIENT INTERNATIONAL DEVELOPMENT A S SOCIATION INTERNATIONAL BANK FOR RECONSTRUCTION AND
SASFP
150 150 300 300
300 300
Date: M a y 3 1, 2007 Country Director: Isabel Guerrero Sr. Country Manager: Fayez Omar Sector Director: Sadiq Ahmed Sector Manager: Simon B e l l Project ID: PE-P102768-LEN Lending Instrument: Specific Investment Loan
Team Leader: Priya Basu Sectors: General finance sector (100%) Themes: Financial sectorPSD/Rural development
Environmental screening category: C Safeguard screening category: N o impact
DEVELOPMENT Total:
Project Financing Data [XI Loan [ XI Credit [ 3 Grant [ 3 Guarantee [ 3 Other:
750 750
For Loans/Credits/Others: IBRD loan US$300 mill ion; IDA credit SDR 196.8 mi l l ion (US$300 mi l l ion equivalent) Total Bank financing (US$m.): 600.00 (equivalent) Prouosed terms: IDA Credit - Standard: IBRD Loan - Variable %read Loan. L ibor +18 basis uoints
Borrower: India
Responsible Agency: Department o f Economic Affairs (Banking Division), Ministry o f Finance, Government o f India, N e w Delh i & National Bank for Agriculture and Rural Development (NABARD), Bandra Kur la Complex, Mumbai
Does the project depart f rom the CAS in content or other significant respects? Re$ No PAD A.3 Does the project require any exceptions f rom Bank policies? Re$ PAD D. 7 [ ]Yes [XINO
I s approval for any policy exception sought f rom the Board? [ ] Y e s [ X ] N o
[XIYes [ ] N o Does the project include any critical r isks rated “substantial” or “high”? Re$ PAD C.5
[ X I Y e s [ ] N o Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7 (Note: These criteria will be met during appraisal).
I
Have these been approved by Bank management? [ ]Yes c IN0
Project development objective Re$ PAD B.2, Technical Annex 3
The project supports the Government o f India’s (GoI) program to reform and revitalize the country’s rural credit cooperative banks (CCBs), which include State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs) and Primary Agricultural Credit Societies (PACS). The project will assist in providing CCBs’ members, including small and marginal farmers, with significantly enhanced access to formal finance (credit, savings, etc.), by ensuring that the potentially viable CCBs in the participating states are transformed into efficient and commercially sustainable institutions.
K e y performance (outcome) indicators, which capture the desired improvements in the financial performance, as wel l as the governance, o f CCBs in the participating states (PS) will include the following:
(a) A rapid and upward trend (increase o f 70 percent over the project life) in ground-level financing (credit) extended to farmers through CCBs;
(b) A rapid and upward trend in the number o f marginal and small farmers who receive credit f rom the CCBs (increase o f at least 50 percent by the end o f the project period, relative to the baseline);
(c) At least three-fourths o f the participating CCBs improve recovery rates by 5 to 10 percent a year, over the project period (relative to the baseline);
(d) At least two-thirds o f the participating CCBs report increased profitability by the end o f the project period (relative to the baseline);
(e) Participating CCBs publish election schedules and hold elections on a regular basis (whenever due), over the project period.
Project description Re$ PAD B.3.a, Technical Annex 4 The project has the fol lowing components:
Component I: Capacity building Technical Assistance (TA) (Bank financing: US$20 mn)
This component will a im to build up the capabilities o f CCBs in al l three tiers to strengthen their abil ity t o comply with the new legal, regulatory and supervisory framework, improve performance, and achieve longer term financial sustainability. The focus will be on capacity building of: (a) the Boards, management and staff o f CCBs in the fol lowing areas: understanding the new legal and regulatory framework and governance codes; improved performance tracking and reporting; implementation o f a new and enhanced common accounting system, management information system (MIS), internal controls, and audit mechanisms; enhanced credit appraisal and risk management; business diversification and product development; and human resources (HR) development; and (b) the members o f selected PACS, through “member education”, focused o n small and marginal farmers; the latter will involve developing and implementing a strategy, focusing o n such areas as financial literacy o f PACS’ members and better awareness o f rights and responsibilities, as wel l as strengthened capacity for self-monitoring.
Assistance will be delivered through a combination o f tools, including the provision o f conventional training programs; training-of-trainers; hands-on, on-the-job training and short-term and medium-term advisory services provided by experts; and study visits/exposure programs. The conventional training programs would be delivered primarily by existing National, Regional, and State-level cooperative training institutions identified by NABARD, which would receive capacity building assistance, including training o f their faculty to design and deliver basic training modules for the CCBs in accounting, auditing, governance, HR management, MIS, members duties and rights, etc. At the level o f DCCBs and PACS, on-the-job training and advisory services will be provided pr imari ly by a cadre o f “mobile trainers/consultants/auditors”. In addition, on-the-job training and advisory services would be provided to the SCBs, as needed; the consulting resources would be mainly national, although some international expertise may be required, on a short-term basis.
1 Component 11: Information technology (IT) (Bank financing: US$80 mn)
This component will support the computerization o f CCBs within each o f the five PS (in a manner that i s compatible across states), to enhance the efficiency and transparency o f the CCBs through enabling the efficient implementation o f the new common accounting system and MIS, and fostering cost efficiencies through facilitating the pooling o f costs related to back office transactions. The component will finance: (a) acquisition o f applications software and i t s ongoing maintenance and enhancement; (b) acquisition of hardware; (c) roll-out services, including data entry o f the init ial database; and (d) users training, provided through conventional training programs as wel l as on-the-job training and advisory services, which would be provided by a cadre o f “mobile trainers/consultants”.
Component I I I : CCS Financial Restructuring Support (FRS) (Bank Financing: US$495 mn)
This component will support the financial restructuring o f potentially viable CCBs by providing recapitalization as a grant (not equity) to wipe out the accumulated losses o f CCBs, restore the value of members’ capital in the CCBs, and bring these institutions to a minimum capital to risk weighted assets ratio (CRAR) o f 7 percent. Whi le PACS will be required to raise this ratio within three years to 9 percent, DCCBs and SCBs shall raise their C R A R as prescribed by the Reserve Bank o f India (RBI). This increase in CRAR shall be met by the CCBs f rom their own resources.
The FRS will start by f i rst bringing the PACS to an acceptable level o f financial health through cleansing o f their balance sheets and strengthening their capital base, and then move o n to the upper tiers. This will enable PACS to clear their dues to the upper t iers and thereby reduce the accumulated losses o f DCCBs. The DCCBs will thereafter be provided assistance to clear the balance o f accumulated losses, if any, and to reach a minimum norm o f capital adequacy. The same process will apply to the SCBs.
T o ensure prudent use o f public resources, only the potentially viable CCBs will be recapitalized. All PACS with a recovery rate o f at least 30 percent as o n June 30, 2004 will be eligible to receive FRS. State governments will be under obligation to determine the future set up/exit strategy for PACS with recovery rates o f less than 30 percent.
Provision o f funds under the FRS will be l inked to the implementation o f a set o f far-reaching and time- bound legal, regulatory and institutional reforms to address the governance and operational weaknesses affecting CCBs. Specifically, pr ior to any funds from Go1 f lowing under this component, the concerned state governments will be required to achieve the following set o f init ial benchmarks: (a) Special Audits are completed (DCCB-wise); (b) the CSA has been revised; (c) the state government contributes i ts share o f capitalization funding; and (d) PACS, DCCBs and SCBs s i g n Letters o f Undertaking with their remective DLIC and SLIC. The benchmarks for the release o f the remaining: recatitalization finds to
CCBs are as follows: (a) the CSA i s amended or special chapter incorporated; (b) elections to the Boards o f CCBs are conducted wherever due; (c) professionals are either elected or co-opted to these Boards as per the fit and proper criteria as may be stipulated by the regulator; (d) professional CEOs satisfying the qualifications as may be prescribed by the regulator are appointed; (e) a sound system o f internal checks and controls put in place by CCBs; and ( f ) “Development Act ion Plans” are signed with NABARD committing them to key performance targets.
PACS with recovery rates o f 50 percent or above will immediately qualify for FRS, provided the above benchmarks are achieved. For PACS reporting recovery rates o f between 30-50 percent, the same procedures as above will be followed, but the transfer o f funds will be divided into three payments to be made at the end o f each implementation year, provided they achieve an incremental increase in their recovery rate by at least 10 percentage points on 30 June 2006 against the benchmark recovery achieved o n 30 June 2004, and an annual increase o f 10 percentage points over the project period, thereafter. Furthermore, i t may be noted that, to ensure that the CCBs have the necessary incentives to continue to improve recovery and overall performance post- recapitalization, they will not be fully compensated for a l l current losses. The recapitalization amount to be provided under the FRS covers accumulated losses as o f 3 1 March 2004, based o n the audited balance sheets o f the CCBs.
To calculate the losses at CCBs (and hence, the recapitalization amount), Special Audits o f accounts will be carried out for a l l the PACS, DCCBs and SCBs based o n uni form accounting criteria. The Special Audits will ensure that, in the event o f insufficient provisioning made by the CCBs, they do not get under-capitalized. A standard format and contents o f the Special Audit reports has been developed, along with a quality assurance system.
Component IV: Implementation (Bank Financing: U S $ 5 mn)
This component (corresponding to the implementation support envisaged under GoI’s package) will cover the fo l lowing areas: (a) overall capacity building for project implementation; (b) support for the Special Audits; and (c) support for ensuring effective project monitoring and information flows throughout implementation, covering improved disclosure and accountability mechanisms at a l l levels (central, state, district and village/grassroots levels). Which safeguard policies are triggered, i f any? Re$ PAD 0.6, Technical Annex 10 None Significant, nonstandard conditions, if any, for: Re$ PAD C.7 Board presentation: June 26,2007 Loadcredi t effectiveness: August 2007 Covenants applicable to project implementation:
(a) GOI, NABARD and the Participating States (PS), as the case may be, shall maintain the DCRR, N I M C , SLICs, DLICs with adequate powers, functions and resources;
(b) NABARD shall implement the Project in PS in accordance with the provisions o f the MOU entered into between GOI, NABARD, and each such PS, and in accordance with the Implementation Manual (IM) agreed with the Bank;
(c) NABARD shall ensure that PS PACS, DCCBs and SCBs issue Letters o f Undertaking, satisfactory to the Bank, for carrying out their respective activities under the Project, in accordance with the CCS Revival Package, the MOU, and the Implementation Manual;
(d) Go1 shall, based o n the MOU and the Letters o f Undertaking provide funds to CCBs to be uti l ized for recapitalizatiodloss reduction under arrangements satisfactory to the Bank;
(e) NABARD shall monitor progress of the project in accordance with indicators satisfactory to the Bank;
The mid-term review o f the project shall be carried out in July 2009; Disbursement for recapitalization (under component 111) wil l be provided in two portions, subject to fulf i l lment o f key benchmarks set-out in the CCS Revival Package and the MoU’s; The Project Implementing Entity (NABARD) shall, within one month o f effectiveness o f the CredidLoan, adopt the design of, and the implementation strategy for, the common accounting, internal control and management information systems, satisfactory to the Association and the Bank, to be implemented by the CCBs pursuant to the respective Letters o f Undertaking; The Project Implementing Entity shall implement the action plan to strengthen the procurement capacity required for Component 2 o f the Project, and ensure that SLICs have undertaken adequate measures to fully implement such a plan; The Go1 wil l ensure that the Project i s carried out in accordance with prudent financial, banking and economic polices, and will ensure that full autonomy wil l be provided to the CCBs in al l financial and internal administrative matters, set forth in the CCS Revival Package and the MOU; The Go1 wil l undertake to suspend or terminate the right o f the PS to use Credit/Loan proceeds, or obtain a refund o f a l l or any part o f the amount o f the CredidLoan withdrawn i f the PS or the CCBs fai l t o perform their obligations under the MOU or the Letters o f Undertaking.
A. STRATEGIC CONTEXT AND RATIONALE
1. Country and sector issues
1. The Indian economy, n o w the world’s fourth largest, has been one o f the best performing economies for a quarter century, but ending poverty remains a central challenge. In recent years, India has recorded unprecedented economic growth, which has averaged about 6.5 percent a year since 1980, and above 8 percent a year since 2003. Over the past two decades, the size o f the middle-class has quadrupled to almost 250 mi l l ion people. Each year, over this period, one percent o f the country’s poor have risen above the poverty line. With population growth having slowed f rom historic highs o f 2.2 percent to 1.7 percent today, economic growth has also brought large gains in per capita income. Despite impressive inroads in poverty reduction, about 270 mi l l ion Indians s t i l l l ive o n under a dollar a day. Some 75 percent o f India’s poor people l ive in rural areas.
2. The Government o f India (GoI) i s committed to sustaining economic growth at 8 percent a year, and to reducing poverty. India’s present coalition government o f the Uni ted Progressive Alliance (UPA), led by the Congress Party, came to power in M a y 2004 o n a plank o f “reforms with a human face”. The UPA adopted as i t s guiding framework a comprehensive and well-balanced program that includes, in addition to continued reforms for private sector growth, and an enhanced social protection program, a big push for rural development and poverty reduction.’ Public pol icy in the rural space has focused, inter alia, o n promoting agricultural productivity, diversification and marketing; strengthening economic infrastructure; improving human development outcomes; creating a social safety net for the rural poor; and, most recently, revamping rural finance.
3. A well-functioning financial sector i s viewed by Go1 as a key pi l lar for sustaining growth and alleviating rural poverty. Go1 fully recognizes that continued financial reforms are critical not just for mobil izing the longer-term savings and investments necessary to sustain and accelerate growth, but also, for promoting equitable growth and better income distribution. By extending the range o f individuals who can get a foothold in the modern economy, finance can play a powerful role in helping India’s poor to catch up with the economy as i t grows, share in the benefits o f growth, and climb out o f poverty. Largely thanks to microfinance, there i s also a growing appreciation o f the “empowerment” dimension o f finance. Empirical evidence f rom around the wor ld also shows that well-functioning financial systems are associated with more rapid and inclusive growth’ (Annex 1).
4. Since the early 1990s, India has introduced impressive financial sector reforms that have proceeded steadily, albeit gradually. Interest rates have been mostly liberalized; capital markets have been substantially deregulated and restrictions on capital inf lows eased; private entry has been allowed into banking, mutual funds and insurance, prudential norms have been tightened and bank capital bolstered; and supervisory systems have been strengthened. The reforms have resulted in increased financial sector competition, diversification, openness, and depth. The share o f private and foreign commercial banks in total financial sector assets has more than doubled in the past decade (although state-owned banks continue to dominate, accounting for about 70 percent o f total banking sector assets); capital markets n o w
’ Key rural development initiatives introduced by Go1 since May 2004 include: a national rural employment guarantee scheme; a major rural infrastructure program; measures to facilitate agricultural marketing and private investment in agriculture; a national rural health mission; and a national education for all program. The Bank i s supporting each o f these programs, in one form or another.
See, for example, Beck, T., A. Demirguq-Kunt and R. Levine (2004), “Finance, Inequality and Poverty: Cross-Country Evidence”, Washington DC: World Bank; Honohan, P (2004), “Financial Sector Policy and the Poor: Selected Issues and Evidence”, World Bank Working Paper No. 43, Washington DC: World Bank.
play an important role, accounting for over one-half o f financial sector assets; the liquidity and depth of the domestic capital markets have increased significantly; and India i s becoming increasingly integrated with the global economy v ia financial channels. Annual portfolio inf lows to India more than tripled from 2000 to 2005, to US$ 12 bil l ion. India’s financial sector assets now exceed US$1 tr i l l ion and the share o f financial assets to GDP i s estimated at 173 percent, much higher than in countries l ike Brazil, Indonesia and Mexico, despite their significantly higher per capita incomes (Annex 1).
5. Whi le these achievements should not be underestimated, and they have provided India’s growing middle-class with access to a range o f increasingly sophisticated financial products and services, reforms
il in the rural finance sector have been slon access to finance from formal sources, l ike commercial banks or cooperative banks. According to a recent Wor ld Bank survey3, some 59 percent o f rural households do not have a deposit account and 79 percent have n o access to credit f rom a formal source. The problem i s particularly severe for small and marginal farmers (the poorest group among rural dwellers, who own up to 4 acres o f land). Some 87 percent o f
rer to 1 take off. India’s rural dwellers s t i l l have very limitc Figure 1. Access to Finance - RFAS 2003
(percentage) 0
0
0
0
0
0 Marginal Small Large Commercial Others Total
.NO credit account UNO savings account I - -
marginal farmers and 70 percent o f small farmers have n o access to credit f rom a
formal financial institution; 70 percent of marginal farmers and 45 percent of small farmers have n o deposit aCCOUnt in a
household income. formal financial institution (Figure 1).
6. In the absence o f formal finance, small and marginal farmers have had to rely heavily on moneylenders, who tend to charge extortionate rates o f interest, ranging from 36 percent to 120 percent a year. At such interest rates, the rural poor risk fall ing into a debt trap from which recovery seems only a very distant prospect. The rise in farmer suicides in states like Andhra Pradesh and Maharashtra i s one manifestation o f this serious problem o f indebtedness in rural India.
7. Against this backdrop, reforming India’s rural finance sector so that it can better serve the needs o f the rural poor has emerged as a critical development priority. GoI’s strategy for the sector has three major thrusts. First , increased competition among the various providers o f rural finance (rural branches o f commercial banks, Regional Rural Banks (RRBs), cooperative credit institutions, microfinance institutions, etc.). Notably, with a lowering o f restrictions on branch licensing in rural areas, and a recent policy allowing banks to operate through ‘correspondents’, private players have begun to expand their rural operations. Policies that restricted competition among banks in rural areas by allowing bank branches to operate only in pre-allocated ‘service areas’, o f about 15-20 villages per bank branch, have also been revised. Steps have been taken to facilitate the expansion o f microfinance institutions (MFIs). Measures have been announced that provide market-based incentives for banks to lend to MFIs, and promote partnerships between commercial banks and MFIs. A microfinance law, designed to improve the pol icy and regulatory framework for the sector, has been tabled in parliament. All these measures have helped increase competition among rural finance institutions (RFIs). However, commercial banks and MFIs have been able to make a dent in meeting the needs o f small and marginal farmers, because o f
“1ndia:Scaling-up Access to Finance for India’s Rural Poor” (2004), Report No. 30740-IN, Washington DC: World Bank.
2
adverse risk perceptions and institutional problems; as such, rural credit cooperatives are the only institutional mechanism available to serve small and marginal farmers (see below).
8. A second thrust o f GoI’s strategy i s to develop products for the better management and mitigation o f r isks in rural finance, with a focus on: (i) revamping agriculture insurance to provide improved coverage o f the r isks faced by small and marginal farmers (this i s being supported through a Bank technical assistance); (ii) fostering partnerships between government and private sector to pi lot weather- index insurance, which can be a good way for farmers to hedge businesses against imponderable weather r i sks (scaling up weather insurance pilots and improving product design i s also being supported through Bank technical assistance); (iii) developing a negotiable warehouse receipt system, which allows farmers to use their crops as collateral for post-harvest financing, thereby potentially reducing default risk and improving the access o f small and marginal farmers to formal financing (a Warehousing Bill has recently been introduced in parliament); and (iv) efforts to develop the commodities futures markets, which would allow better price discovery and make an important contribution to addressing the risk o f fall ing commodity prices, which i s among the main sources o f farmer default. A model act has been formulated to reform the agricultural produce marketing legislation at the state level; the act could make an important contribution to fostering a single national market for agricultural commodities.
9. A third thrust i s the reform o f R F I s so that they are better positioned to provide financial services to small and marginal farmers; the immediate focus i s on the rural cooperative credit system (CCS), which has the largest network among a l l types o f R F I s in India (one outlet for every six villages in India), and i s potentially the best-positioned to serve small and marginal farmer^.^ India’s CCS comprises 108,779 village-level Primary Agricultural Societies (PACS), 367 District Central Cooperative Banks (DCCBs) and 3 1 State Cooperative Banks (SCBs). Fol lowing years o f polit ical interference, poor governance, weak regulation and supervision, and inadequate management capacity, a very large number o f CCS institutions-henceforth referred to as rural cooperative credit banks (CCBs)-are severely impaired, and cannot, at present, provide financial services to the poor on a commercially sustainable basis (Figure 2).5 The scale o f the problem in the CCBs differs between the states and across institutions, but some common features are discernable: in a very large number o f CCBs, elections have not taken place for a long time, Boards are fkequently superseded, State Governments regularly interfere in day-to- day operational decisions, regulation and supervision i s inadequate, internal controls are weak or non- existent, MIS i s absent, etc.
Figure 2: State of Rural Credit Cooperatives in India 70% 7
PACS 67%
60% - DCCB6
DCCBS
SCBS mK
Source: Analysis using NABARD and RBI data for end March 2005, except overdues NA=Not available
Another category o f rural finance institutions, also in distress, is the group o f around 95 RRBs, although they are better- positioned to serve larger farmers. RRB reforms so far have focused on mergers that has resulted in the number o f R R B s reducing from 196. Go1 intends to intensify these reforms in the last annual budget.
T h e term Cooperative Credit Banks (CCBs) is used to include all three levels - state (SCB), district (DCCB) and village (PACS) - although the majority o f PACS are currently not formally licensed as “banks.”
10. Go1 recognizes that, while the CCBs are best-positioned to serve the financial needs of small and marginal farmers, the system has a poor track record, and that i t needs to be overhauled if it i s to become an effective mechanism for the delivery o f financial services to the rural poor. W h i l e committees appointed by previous governments have spelled out what needs to be done to reform CCBs, the Government has made a major breakthrough by building consensus for far-reaching reforms with stakeholders, key among which are the State Governments, which have jo in t responsibility (with GoI) for the CCBs, under the Indian Constitution.
11. In January 2006, Go1 announced an assistance package (henceforth referred to as the “Go1 Package”) designed to transform the potentially viable CCBs into democratically governed, efficiently managed, financially sustainable, self-reliant entities that can provide a wider range o f financial services to the rural poor o n more affordable terms (Annex 1). States can access financial and technical assistance under the Go1 Package, provided they agree to implement a set o f far-reaching and time-bound legal, regulatory and institutional reforms to address the governance and operational weaknesses affecting CCBs (see B o x 1); these are contained in a memorandum o f understanding (MoU) that states are required to s ign with Go1 and the National Banks for Agriculture and Rural Development (NABARD), as a starting point for participation.
Box 1: Legal, Regulatory and Operational Reforms under GoI’s Package for Strengthening Rural Credit Cooperatives
Legal reforms under the Go1 Package require states to amend their Cooperatives Societies Act (CSA). These amendments are designed to:
minimize State Governments’ ownership stake in CCBs; ensure full voting membership rights for a l l users (members) o f financial services from CCBs, including depositors in PACS; provide operational autonomy to the CCBs in al l financial and internal administrative matters, especially in the following areas: (i) interest rates on deposits and loans, (ii) borrowings and investments, (iii) loan policies and individual loan decisions, (iv) personnel policies, staffing and recruitment (the system o f cadre secretaries to PACS w i l l be abolished), (v) internal control systems, and appointment o f auditors and compensation for the audit; permit CCBs in al l three tiers freedom to take loans from any regulated financial institution and not necessarily from only the upper tier and, similarly, placing their deposits wi th any regulated financial institution o f their choice, beyond certain agreed thresholds; minimize the State Government’s participation on the Boards o f CCBs and limit the powers o f State Governments to supersede the Boards o f CCBs; ensure timely elections before the expiry o f the te rm o f existing Boards; and facilitate the regulatory powers o f the Reserve Bank o f India (RBI) over SCBs and DCCBs
Regulatory reforms under the Go1 Package are designed to significantly enhance the regulation and supervision o f CCBs, through the effective enforcement o f the central bank’s regulations, while reducing the powers currently vested with State Governments. Specifically, under the new regulatory regime:
al l SCBs and DCCBs are required to adhere to the central bank’s prudential norms and corporate governance standards. RBI regulatory prescription will apply in all matters related to elections to the Boards and appointment o f Board members, who w i l l be required to comply wi th the fit and proper criteria as stipulated by the regulator, and matters relating to the supercession o f Boards and winding up/liquidation o f a DCCB or SCB. Furthermore, professional CEOs who satisfy RBI-prescribed qualifications w i l l be appointed. the powers o f State Governments over PACS are to be significantly reduced, wi th a commensurate enhancement o f NABARD’s role, including in prescribing prudential norms (including CRAR), criteria for elections to Boards; conditions for the supercession o f Boards; payment o f dividends by PACS, and so on.
The Go1 Package includes a number o f measures designed to achieve operational strengthening o f CCBs. These require CCBs to (a) install and adhere to enhanced, uniform accounting and financial monitoring systems, internal control systems, improved credit appraisal, risk management, etc.; and (b) implement new staffing and recruitment policies.
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12. Voluntary participation by states ensures ‘self selection’ o f states that are genuinely committed to implementing the reforms deemed necessary to revive potentially viable CCBs on a sustainable basis. As o f end-May 2007, the following 11 states had signed MoUs : Andhra Pradesh (AP), Arunachal Pradesh, Bihar, Gujarat, Haryana, Madhya Pradesh (MP), Maharashtra, Orissa, Rajasthan, Uttar Pradesh (UP) and Uttarakhand. A few more states are l ikely to j o i n before the cut-off date o f January 2008.
13. The Go1 Package covers assistance for: (a) capacity building to strengthen the managerial and technical capabilities o f potentially viable CCBs and improve networking; (b) investments in computerization to support better connectivity among CCBs and enhanced cost efficiency; (c) financial restructuring support to bring the potentially viable CCBs to an acceptable level o f health; and (d) support for the overall implementation o f the Go1 Package, which i s expected to be implemented within a period o f three years f rom the date on which any state signs the M o U with Go1 and NABARD. CCBs that remain ineligible for assistance under the Go1 Package, or cannot comply with the performance targets set by the Package, are to be wound up in a timely manner, through mergers or liquidation.
14. The Go1 Package i s underpinned by analysis conducted by a Task Force6 appointed by GoI, and supported by the Bank’s economic and sector work (ESW)’. The Task Force made a compelling case for reviving potentially viable CCBs, pointing to the absence o f cost-effective and realistic alternatives that could substitute for their potential outreach to the rural poor within any reasonable timeframe. Indeed, the evidence shows that commercial banks are neither able nor willing to serve the poorest in rural areas; the average loan size o f commercial banks’ rural loans i s Rs 3 1,585 (US$765), compared to the average rural loan size o f CCBs, which i s Rs. 6,637 (US$160). A number o f MFIs have emerged over the last decade, but they are concentrated mainly in a few southern Indian states and are currently estimated to reach about 15 mi l l ion clients; scaling up will take time. In contrast, the total membership o f the lowest tier o f CCBs (the PACS) i s about 127 mill ion; 47 mi l l ion o f these are small and marginal farmers. Despite their weak financial condition, the CCBs s t i l l account for 22 percent o f formal agricultural credit provision, respectively. In states l ike Maharashtra, Orissa, Rajasthan, Gujarat, Chhatisgarh and Haryana, the CCBs provide more than 50 percent o f the formal credit for agriculture.
15. Consensus quickly emerged in India that the financial and polit ical cost o f liquidating the CCBs would be significantly higher than the estimated cost o f restructuring the potentially viable institutions, provided these could be selected on the basis o f clear and transparent criteria, and provided that CCBs with n o turnaround prospects would be wound up. In particular, the cost associated with the undefined pension liabilities o f the CCBs and staff redundancies, weak prospects for recovering nonperforming assets in the event o f liquidation, and the concurrent fiscal impact on the State Governments providing guarantees to CCB borrowings were judged to be too large, while the economic and social dislocation in terms o f income and employment losses for both existing and potential clients were viewed as untenable.
16. Moreover, evidence from India and abroad shows that the benefits o f well-functioning Cooperative Financial Institutions (CFIs) could be high. There are examples f rom many districts in Southern India (e.g., Bidar, South Kanara, Chandrapur, Hassan and Trichy), where isolated reforms o f CCBs have enabled them to play an important role in providing financial services to small and marginal farmers in a financially sustainable manner. In addition, India’s recent experience with reforming Urban Cooperative Banks (UCBs) through an approach similar to the proposed Go1 Package for rural CCBs has generated a positive impact (Box 2). Among developing countries, Mexico has, in recent years, introduced reforms o f the savings and credit cooperative system, resulting in a transformation that i s
T h e Task Force was appointed in August 2004 under the Chairmanship of Professor A. Vaidyanathan, to assess the problems in the CCBs and prepare a practical plan for the way forward; i t s final report was submitted in 2005. ’ Basu, Priya (2006), “Improving Access to Finance for India’s Rural Poor”, Directions in Development Series, Washington DC: World Bank; “1ndia:Scaling-up Access to Rural Finance” (2004), Report No. 30740-IN, Washington DC: World Bank.
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allowing the country’s financial cooperatives to make a real contribution towards improving access to finance for the underserved; this has been assisted by a Bank-supported program (BANSEFI). On-going studies identify Brazi l and Burkina Faso, as well as Ecuador and the Philippines, as additional examples where the credit cooperative sector has made a significant contribution to improved access to finance, including in rural areas. Examples also exist f rom countries such as Canada, the Netherlands, Germany and the US, where credit cooperative banks have played a key role in extending the outreach o f financial services to poorer segments, without compromising financial sustainability.
Box 2: Urban Cooperative Banks (UCBs) Reform
In 2005, India initiated a set o f reforms to strengthen the country’s UCBs. The reforms focused on (i) identifying potentially viable UCB’s and strengthening their capital base, while dealing wi th unviable ones; and (ii) rationalizing the regulatory and supervisory framework for UCBs to strengthen R B I ’ s oversight over the system. These reforms included:
(a) Signing o f M o U between RBI and State Governments to form a State level Task Force for Cooperative Urban Banks (TAFCUB). The TAFCUBs, set-out to identify the potentially viable and unviable weak banks in each signatory state (8-States have signed on so far), grade these institutions according to certain performance criteria, and suggest revival plans for the potentially viable banks and a non-disruptive exit route for unviable/weak banks. The exit route has included mergedamalgamation with strong banks, conversion into society or, as a last resort, liquidation.
(b) Introduction o f a two-tier regulation system whereby smaller UCBs whose operations are limited to a single district and have deposits o f less than Rs.100 crore* have been: (i) allowed to adopt 180-day delinquency norm for classification o f assets as nonperforming, (ii) given exemption from maintaining the Statutory Liquidity Ratio (SLR) in Government securities (iii) exempted from the provisioning norms o f 0.40 per cent o f standard advances which have recently been applied to the larger UCBs.
(c) Introduction o f a two-tier supervision system where larger UCBs are placed under a composite Off-site Surveillance (OSS) reporting system comprising a set o f eight prudential supervisory returns, while smaller banks having deposits between Rs.50 crore and Rs. 100 crore and whose branches are limited to a single district are placed under a simplified reporting system consisting o f five returns.
The impact o f these reforms i s already visible. Closer oversight from RBI has improved commercial discipline and the overall performance o f the sector. N e t W A S for UCBs as a percentage o f total advances have decreased from 13 percent in 2003 to 9.6 percent in 2006, while their net profits jumped by 144 percent f rom 2004-05 to 2005-06. The number o f UCBs classified in the top grade has increased, while the number o f weak UCBs in the lower two grades has declined in those States which were among the first to s i g n the MoUs and form their TAFCUBs (such as Andhra Pradesh, Gujarat and Karnataka). In addition, effective resolution strategies for weaker UCBs have resulted in a decrease in the number o f UCBs in those states - reflecting a serious process o f consolidation.
Source: RBI Trends and Progress in Banking in India, 2006. * 1 crore = 10,000,000
17. Against this backdrop, and recognizing the role that development partners, including the Bank, could play in strengthening the design and implementation o f the Go1 Package, as wel l as in providing financial support, Go1 has requested financial and technical assistance f rom the Bank, and other development partners, to support i t s Package.
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2. Rationale for Bank involvement
18. There are many compelling reasons for the Bank to support the Go1 Package. First, the proposed project would allow Go1 to implement i t s reforms in a more effective and sustainable manner. Through i t s involvement, the Bank could bring best practices and technical expertise, drawing on extensive experience in the reform o f financial cooperatives worldwide and on lessons learned from projects in India (Annex 2). A key feature o f the Bank’s value addition during project preparation has been to bring in a wide range o f international experience, f rom countries such as Canada, Mexico, the Netherlands, US. Second, Bank involvement in supervision throughout the project period should help augment the impact o f the reforms. In particular, the Bank has considerable expertise in designing monitoring and evaluation (M&E) systems for similar projects. Third, the Bank’s involvement should contribute towards insulating the reforms from possible polit ical interference during the project period. Fourth, the proposed project would contribute to bringing together the other international development partners who are providing assistance to GoI’s reforms.
3. Higher level objectives to which the project contributes
19. By providing small and marginal farmers with improved financial services f rom a revitalized CCS, the proposed project i s expected to help these groups break out o f the clutches o f usurious moneylenders, reduce indebtedness, diversify their rural economic activities, increase incomes, and improve livelihoods, thereby supporting broad-based rural growth, poverty reduction and equity. These objectives are closely aligned with the Bank’s India Country Strategy (CAS), 2004.
B. PROJECT DESCRIPTION
1. Lending instrument
20. The lending instrument i s a Specific Investment Loan (SIL), to be financed by a combination o f IDA and IBRD resources, in equal proportion, totaling US$600 mi l l ion (equivalent). For the IBRD component, the Borrower has opted for a variable spread loan (VSL). This product carries a variable lending rate that consists o f a six-month L I B O R and a variable interest spread. The charges for VSLs include a front-end fee’ and a commitment fee, apart f rom the contractual spread. At present, after factoring in the benefits o f sib-LIBOR funding costs, current loan charge waivers, the expected disbursement profi le o f the project, grace period o f f ive years and final maturity o f 20 years, the all- inclusive (blended) cost for this loadcredit i s estimated at 2.67 percent ’. 2 1. The total costs o f implementing the Go1 Package (at the all-India level) have been estimated at Rs. 13,596 crore (a l itt le over US$3 billion).” The costs will be shared by the Central Government (estimated at 68 percent), State Governments (estimated at 28 percent) and the CCS (estimated at 4 percent). The Central Government (GoI) will provide i t s share (a l itt le over US$2 bil l ion) as grants, while the states will meet their share f rom their budget or through open market borrowing. Bank-financing through the proposed project would be used to fund a part o f GoI’s contribution.
22. The Bank’s funds are expected to f low to such ‘participating states” (PS) that have signed M o U s with Go1 and NABARD, possibly including: Gujarat, Haryana, Orissa, Uttarakhand and Uttar
T h i s has been waived for the current fiscal year. ’The cost o f the IBRD portion would be 5.44 percent, i.e., LIBOR+18 basis points. lo Should the ultimate cost o f the program end up being higher than originally anticipated, Go1 is committed to making the additional resources available.
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Pradesh. The total costs o f implementing the Go1 Package in the f ive PS are estimated at U S $ l .l billion, o f which, the Central Government’s (GoI) share i s US$750 mill ion, while the State Governments and CCBs wil l cover the rest (Annex 5). Release o f funds by the State Governments wil l be a condition for the release o f funds by GoI. The Bank’s loadcredit wil l fund 80 percent o f GoI’s total contribution to the Package in each o f the five states.
23. Over time, more states could be added to the l i s t o f PS, depending upon how the project, and the larger Go1 Package, evolves. Additional Financing (as per the Bank’s Revised Guidelines on Additional Financing for Investment Lending, June, 2005) f rom the Bank could be considered to support the subsequent scaling up o f the project’s development impact, provided results achieved under the project meet the criteria for Additional Financing.
2. Project development objective and key indicators
24. The project will assist in providing members o f the CCBs, including small and marginal farmers, with significantly enhanced access to formal finance (credit, savings, etc.), by ensuring that the potentially viable CCBs in the Participating States are transformed into efficient and commercially sustainable institutions (Annex 3).
25. performance, as wel l as the governance, o f CCBs in PS wil l include the following:
K e y performance (outcome) indicators, which capture the desired improvements in the financial
(a) A rapid and upward trend (increase o f 70 percent over the project life) in ground-level financing (credit) extended to farmers through CCBs;
(b) A rapid and upward trend in the number o f small and marginal farmers who receive credit f rom the CCBs (increase o f at least 50 percent by the end o f the project period, relative to the baseline);
(c) At least three-fourths o f the participating CCBs improve recovery rates by 5 to 10 percent a year, over the project period (relative to the baseline);
(d) At least two-thirds o f the participating CCBs report increased profitability by the end o f the project period (relative to the baseline);
(e) Participating CCBs publish election schedules and hold elections o n a regular basis (whenever due), over the project period.
3. Project components
26. components (Annex 4 and 5):
Consistent with the key elements o f the Go1 Package, the proposed project has the fol lowing
Component I: Capacity Building Technical Assistance (TA) (Bank financing: US$20 mn)
27. This component (corresponding to the human resources (HR) development initiative under the Go1 Package) will a im to build up the capabilities o f CCBs in al l three tiers to strengthen their abil ity to comply with the new legal, regulatory and supervisory framework, improve performance, and achieve longer term financial sustainability. The focus will be on building up the capacity of: (a) the Boards, management and staff o f CCBs in the following areas: understanding the new legal and regulatory framework and governance codes; improved performance tracking and reporting; implementation o f a new and enhanced common accounting system, management information system (MIS)/internal controls, and audit mechanisms; enhanced credit appraisal and risk management; business diversification, product development, and networking; and HR development; and (b) members o f selected PACS, through “member education”, focused on small and marginal farmers, the latter wi l l involve developing and
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implementing a strategy, focusing on such areas as financial literacy, and better awareness o f rights and responsibilities, among PACS’ members, as wel l as strengthened capacity for self-monitoring.
28. Assistance will be delivered through a combination o f tools, including the provision of conventional training programs; training-of-trainers; hands-on, on-the-job training and short-term and medium-term advisory services provided by experts; and study visits/exposure programs. The conventional training programs would be delivered primarily by existing National, Regional, and State - level cooperative training institutions identified by NABARD, which would receive capacity building assistance, including training o f their faculty to design and deliver basic training modules for the CCBs in accounting, auditing, governance, HR management, MIS, and members duties and rights, etc. At the level o f DCCBs and PACS, on-the-job training and advisory services will be provided primarily by a cadre o f “mobile trainers/consultants/auditors”. In addition, on-the-job training and advisory services would be provided to the SCBs, as needed; the consulting resources would be mainly national,, although some presence o f international expertise may be required, at least o n a short-term basis (Annex 4).
Component 11: Information Technology (IT) (Bank financing: US$80 mn)
29. This component (corresponding to the computerization initiative under the Go1 Package) will support the computerization o f CCBs within each o f the five PS (in a manner that i s compatible across states), to enhance the efficiency and transparency o f the CCS through enabling the efficient implementation o f the new common accounting system and MIS, and fostering cost efficiencies through facilitating the pooling o f costs related to back office transactions. The component wi l l finance: (a) acquisition o f applications software and i t s ongoing maintenance and enhancement; (b) acquisition o f hardware; (c) roll-out services, including data entry o f the init ial database; and (d) users training, provided through conventional training programs as wel l as on-the-job training and advisory services, which, would be provided by a cadre o f “mobile trainers/consultants” (Annex 4).
Component 111: CCS Financial Restructuring Support (FRS) (Bank Financing: US$495 mn)
30. This component (corresponding to the recapitalization initiative under the Go1 Package) will support the financial restructuring o f potentially viable CCBs by providing recapitalization as a grant (not equity) to wipe out the accumulated losses” o f CCBs, restore the value o f members’ capital in the CCBs, and bring these institutions to a minimum capital to risk weighted assets ratio (CRAR) o f 7 percent. Whi le PACS will be required to raise this ratio within three years to 9 percent, DCCBs and SCBs shall raise their C R A R as prescribed by the RBI. This increase in C R A R shall be met by the CCBs f rom their own resources.
31. The FRS will start by first bringing the PACS to an acceptable level o f financial health through cleansing o f their balance sheets and strengthening their capital base, and then move o n to the upper tiers. This step will enable PACS to clear their dues to the upper tiers and thereby reduce the accumulated losses o f DCCBs. The DCCBs wil l thereafter be provided assistance to clear the balance o f accumulated losses, if any, and to reach a minimum norm o f capital adequacy. The same process wil l apply to the SCBs.
32. T o ensure prudent use o f public resources, only the potentially viable CCBs will be recapitalized. All PACS with a recovery rate o f at least 30 percent as on June 30, 2004 will be eligible to receive FRS. State Governments will be under obligation to determine the future set up/exit strategy for PACS with recovery rates o f less than 30 percent.
I’ T h i s however does not mean writing of f loans that are yet to be repaid by borrowers; the CCBs wi l l have to continue to make efforts to recover bad loans, post-recapitalization.
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33, Provision o f funds under the FRS will be l inked to the implementation o f a set o f far-reaching and time-bound legal, regulatory and institutional reforms to address the governance and operational weaknesses affecting CCBs. Specifically, prior to any funds f rom Go1 f lowing under this component, the concerned State Governments will be required to achieve the fol lowing set o f in i t ia l benchmarks: (a) SAs are completed (DCCB-wise); (b) the CSA has been revised; (c) the State Government contributes i t s share o f capitalization funding; and (d) PACS, DCCBs and SCBs s i g n Letters o f Undertaking with their respective DLIC and SLIC. The benchmarh for the release o f the remaining recapitalization funds to CCBs are as follows: (a) the CSA i s amended or special chapter incorporated; (b) elections to the Boards o f CCBs are conducted wherever due; (c) professionals are either elected or co-opted to these Boards as per the fit and proper criteria as may be stipulated by the regulator; (d) professional CEOs satisfying the qualifications as may be prescribed by the regulator are appointed; (e) a sound system o f internal checks and controls put in place by CCBs; and ( f ) “Development Act ion Plans” (DAPs) are signed with NABARD committing CCBs to key performance targets12 (Annex 4, 6, 7).
34. PACS with recovery rates o f 50 percent or above will immediately qualify for FRS, provided the above benchmarks are achieved. For PACS reporting recovery rates o f between 30-50 percent, the same procedures as above will be followed, but the transfer o f funds will be divided into three payments to be made at the end o f each implementation year, provided they achieve an incremental increase in their recovery rate by at least 10 percentage points on 30 June 2006 against the benchmark recovery achieved on 30 June 2004, and an annual increase o f 10 percentage points over the project period, thereafter. Furthermore, i t may be noted that, to ensure that the CCBs have the necessary incentives to continue to improve recovery and overall performance post- recapitalization, they will not be fully compensated for al l current losses. The recapitalization amount to be provided under the FRS covers accumulated losses as o f 3 1 March 2004, based o n the audited balance sheets o f the CCBs.
35. T o calculate the losses at CCBs (and hence, the recapitalization amount), Special Audits (SAs) o f accounts will be carried out for a l l the PACS, DCCBs and SCBs based on uni form accounting riter ria.'^ The SAs will ensure that, in the event o f insufficient provisioning made by the CCBs, they do not get under-capitalized. A standard format and contents o f the special audit reports has been developed. The SAs will be conducted by the audit staff o f the State Cooperative Departments, under the supervision o f NABARD, and involv ing the District-level Implementation Committees (DLICs) and State-level Implementation Committees (SLICs) set up to assist with implementation. Quality assurance over the SAs i s to be provided by the DLICs, which are required to review the SAs and recommend to the SLICs the recapitalization amount required for the concerned CCBs. Besides representatives f rom NABARD, the DCCB, and the State Government, each D L I C includes a Chartered Accountant (CA), who i s mandated by the Committee to conduct a sample check (15 percent) o f the SAs. Based on the recommendation o f the DLICs, the SLICs, which also include a CA, have the role o f approving the amount o f recapitalization funds to be provided to the CCBs.
Component IV: Implementation (Bank Financing: U S $ 5 mn)
36. This component (corresponding to the implementation support envisaged under the Go1 Package) will cover the fo l lowing areas: (a) overall capacity building for project implementation; (b) support for the SAs, and (c) support for ensuring effective project monitoring and information flows throughout
These DAPs would specify performance targets to be achieved by the DCCBs and SCBs over a three year period. l3 It may be noted that the SAs are financial reviews (rather than fully-fledged audits), and are designed specifically to re- compute the accumulated losses o f CCBs, by applying the standard provisioning norms, as prescribed by RBI. The SAs will update previous figures used at the time the GoI’s package was being formulated. At that time, the accumulated losses in the system were estimated at Rs. 9,277 crores (a l i t t l e over US$2 billion), with the breakdown as follows: Rs. 4,595 crores for the PACS, Rs. 4,401 crores for the DCCBs, and Rs. 281 crores for the SCBs.
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implementation, covering improved disclosure and accountability mechanisms at a l l levels (central, state, district and village/grassroots levels) (Annex 4).
4. Lessons learned and reflected in the project design
37. The design o f this project has benefited f rom the significant body o f ESW carried out by the Bank in India over the past four years.14 The approach taken i s consistent with various completed and/or ongoing Bank operations for the restructuring o f financial cooperatives (e.g., the BANSEFI project in Mexico); other related projects/programs (e.g., Bank Rakyat Indonesia’s Unit Desas, which were restructured into a highly profitable entity f rom a politicized and loss making credit agency for rice farmers; Bank Pertanian Malaysia; Banco Agricola de l a Republica in the Dominican Republic; and the Bank for Agriculture and Agricultural Cooperatives in Thailand) (Annex 2).
38. These financial sector operations point to the following key lessons that are critical to achieving sustainable improvements in the performance o f financial institutions: (a) project design must be grounded in in-depth financial and institutional analysis; (b) any financial injections to cover losses be accompanied by the necessary reforms in the overall legal, regulatory and governance framework, and TA to strengthen the managerial and technical capabilities o f the financial institutions and agencies involved in project implementation; (c) key reforms, that involve upfront commitments to good governance, competition and market discipline, should be front-loaded, so that financial injections are provided after governments and institutions have demonstrated a sufficient level o f commitment to the restructuring effort; (d) selectivity i s o f the essence, so that institutions that have n o prospects for turnaround should be identified (based on clear and transparent criteria that are established upfront), and their exit facilitated through such means as closures or mergers, and only the potentially viable institutions should be supported through financial assistance and TA; this will ensure the chances o f successful restructuring and minimize fiscal costs to governments; and (e) stakeholder commitment and coordination are essential. These lessons have been incorporated into the project’s design.
39. Specific lessons f rom projects that have involved the restructuring o f financial cooperatives have also been incorporated, including the importance o f capacity building for networkmg and IT investments that can help in the pooling o f costs and helping these institutions to achieve scale economies. Some Bank funded projects involving large IT investments have not been successful; problems have resulted mainly f rom inappropriate preparation or weak project supervision, especially in cases where the related software deals with complex or relatively unique business requirements. The IT component under the proposed project i s relatively straight forward f rom a business, technical and implementation perspective, and involves small contracts to be procured at the State-level. The main source o f complexity i s that o f scale; in essence, the need to procure complete solutions for a large number o f institutions in parallel. Based o n lessons from previous operations, the project addresses this issue by ensuring that CCBs are provided with ‘packaged solutions’ that include the necessary implementation support under the IT component, to ensure that the sought after business benefits are realized in practice. One way o f achieving this i s by requiring that the software supplier be contractually obliged to provide a working solution for the acquiring institution (Annex 2).
40. The Bank’s rural poverty reduction and livelihoods projects in India, which also include financial sector components, point to some useful lessons, and these have been incorporated into project design.
l4 See, for example: World Bank (2004), op. cit.; Basu, Priya and Pradeep Srivastava (2005), “Exploring Possibilities: Microfinance and Rural Credit Access for the Poor in India”, Economic and Political Weekly V o l XL No. 17, pp 1747-1756; Basu, Priya (2006). “Improving Access to Finance for India’s Rural Poor”, Directions in Development Series, Washington DC: World Bank; “National Agriculture Insurance Scheme: Market based solutions for better risk sharing” (2007), Washington DC: World Bank.
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K e y among these i s the finding that the mobilization o f the ultimate beneficiaries at the grassroots level i s critical for minimizing the r isks o f polit ical or government capture, and for ensuring that the desired outcomes are achieved. Accordingly, the project pays particular attention to strengthening the capacity o f small and marginal farmers (the PACS’ members) in project monitoring.
41. The project also incorporates lessons f rom successful sector-wide approaches (SWAPS), by placing a strong emphasis on strengthening governance and implementation capacity by encouraging strong country ownership, coordinated and open policy dialogue among the various development partners involved in the project, sector-wide accountability and strengthening o f fiduciary safeguards, and improvements in client capacity, systems and institutions.
42. Recent reviews by the Bank’s Independent Evaluation Group (IEG) and Quality Assurance Group (QAG) o f Bank assistance to the financial sector during FY93-05 have found that the Bank’s presence contributed to financial sector development in client c o ~ n t r i e s . ’ ~ According to IEG’s Review o f March 2006, the outcomes o f lending for financial sector reforms that were categorized as being under the auspices o f the Financial Sector Network (FSE) were significantly better than those o f finance components within multi-sector operations. By and large, outcomes o f financial sector operations averaged 85 percent satisfactory, while finance components o f multi-sector operations averaged 75 percent satisfactory, slightly below the 79 percent average for al l adjustment and TA lending, excluding the financial sector. These results are l ikely to have been driven by the fact that financial sector loans designed by FSE specialists had better technical designs. In i t s M a y 2006 synthesis report, IEG concluded that Bank lending and non-lending support, except for lines o f credit, helped catalyze positive changes in depth and access to credit. Bank lending contributed positively to changes in governance, regulatory framework, market structure and efficiency, primarily in the banking sector, although non-bank sectors have increased in importance (IEG synthesis, M a y 2006). Lending accompanied by TA produced better outcomes than without TA.
5. Alternatives considered and reasons for rejection
43. Regarding the choice of lending instrument, a development policy loan (DPL) was not deemed appropriate for the reason that the project’s success crucially depends o n the deployment o f project funds towards investments in the various areas for which they are earmarked. Furthermore, after careful consideration, i t was agreed that the project’s design and objectives would not be appropriately supported through an Adaptable Program Loan (APL). The project i s designed to support a set o f CCS reforms to be implemented over a well-defined (three year) time frame in states that are willing to participate. Any state wishing to participate must j o i n by January 2008, at the latest, which means that the outer limit o f the project’s implementation timeframe i s January 201 1. There are n o provisions, at this stage, to implement subsequent phases o f reforms in the PS, or to expand the Go1 Package to cover states that do not j o i n by January 2008. However, should this change, and depending on the outcomes in the participating states, the Bank could consider supplemental assistance for deepening reforms in CCBs in the participating states or expanding support to cover CCBs in new states through the Additional Financing route. A SIL, with the possibility o f Additional Financing, would provide the necessary flexibil i ty to deepen reforms, over time, i f needed, and expand coverage to new states that may enter at a later date. This would provide
l5 IEG evaluations were presented in the following reports: (i) “IEG Review o f World Bank Assistance for Financial Sector Reform”, March 2006; ( i i ) ‘World Bank Lending for Lines o f Credit: An IEG Evaluation”, May 9, 2006 and (iii) “Financial Sector Assessment Program: IEG Review o f the Joint World Bank and IMF initiative”, May 16, 2006. IEG compiled the key findings o f all three reports into one publication, “World Bank Assistance to the Financial Sector: A Synthesis o f IEG Evaluations”, May 18, 2006. QAG assessments consist of: (i) “Quality o f Country AAA: A QAG Assessment”, November 2005; and (ii) “Quality Enhancement System for Lines o f Credit: A QAG Assessment”, December 2006.
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the Borrower with the option to seek additional financial support f rom the Bank, but with lower financial charges (commitment fees).
C. IMPLEMENTATION
1. Partnership arrangements
44. The project will adopt a sector-wide investment approach (SWAP), with Bank funds provided to Go1 through “parallel” financing. The SWAP will enable the Bank to support GoI’s reforms in a comprehensive and coordinated manner across the PS, and leverage Bank resources to scale-up impact. Bank financing to Go1 i s complemented by financing f rom a number o f donors, including: the Asian Development Bank (ADB), KfW and DFD. ADB’s Board has approved (in December 2006) a policy based programmatic loan o f US$1 b i l l ion to Go1 for this purpose; the loan supports a l l aspects o f the Go1 Package. A loan o f US$175 mi l l ion (equiv.) f rom KfW to support the recapitalization component o f the Go1 Package i s being prepared. The ADB and KfW funds will f l ow to five states (not including the PS to be supported by Bank funds). DFID has also committed to providing a grant o f US$2 mi l l ion to Go1 to support the technical assistance components o f the Go1 Package. In addition, GTZ i s supporting Go1 with project preparatory activities, including the development o f common accounting, auditing and M I S frameworks for the CCBs.
45. The concerned development partners will meet regularly to facilitate effective coordination and communication. Arrangements for M&E, reporting, financial management, fiduciary oversight, etc., to be used for the implementation o f the Go1 Package across states, have been agreed. N o t only will this help ensure more effective implementation, but also, it will help reduce duplicative reporting and transactions costs for the Borrower, and a greater focus o n results.
2. Institutional and implementation arrangements
46. The Banking Divis ion at the Department o f Economic Affairs (DEA), Ministry o f Finance (MoF), Go1 has been designated to provide overall pol icy guidance and monitoring, while NABARD i s the main implementing agency. A dedicated Department for Cooperative Reforms and Revival (DCRR), currently staffed by nine officers, has been set up within NABARD to coordinate implementation. A three-tier structure has been established to support implementation and monitoring. This includes: (a) a National-level Implementation and Monitoring Committee (NIMC), which i s responsible for the overall pol icy and strategic direction o f the reforms; (b) SLICs; and (c) DLICs. The composition, detailed terms o f reference (TORS), and operating guidelines for these committees have been drawn up (Annex 6). Support teamslsecretariats, staffed with NABARD officials, have been established to help the SLICs and DLICs in their day-to-day functions.
47. NABARD will be responsible for project financial management (FM) and reporting. T o ensure that these functions are performed efficiently and effectively, NABARD will provide requisite staffing to ensure that these functions are performed adequately. FM capacity, focused o n accounting, MIS, internal controls, etc. will be built up in CCBs at all three levels, supported through Components I and I1 o f the project (Annex 7).
48. NABARD i s fully committed to enhancing transparency under the project. Besides the on- demand disclosure o f information, NABARD has initiated proactive (suo moto) disclosures that include the public disclosure o f all key documents related to the Go1 Package. NABARD further intends to enhance disclosures to fully comply with provisions o f the Right to Information (RTI) A c t 2005, including section 4 o f the act on proactive disclosures. Below i s a summary o f actions that NABARD i s committed to take to fully comply with the RTI and enhance transparency and accountability:
13
e
e
e e
Develop a disclosure strategy with the objective o f allowing greater access to information suo moto to reduce the need for requests for information by the public; Develop systems and procedures to implement the disclosure pol icy including document management system and information management system; Develop organizational arrangements and capacity building plan; Plan reporting and monitoring arrangements to monitor implementation o f the disclosure policy.
49. NABARD will conduct a period review o f compliance with the disclosure requirements under the RTI and take actions to enhance disclosure on an on-going basis. NABARD has appointed a senior person as the central public information officer responsible for RTI for the organization. Further, at the regional level, NABARD's Public Information Officers will p lay this role and at the departmental level, the departmental heads would be additional focal points.
50. NABARD will be responsible for the overall coordination o f procurement under the project, and wil l ensure compliance with the agreed procurement procedures. Procurement under the IT component wil l fo l low standardized guidelines, issued by NABARD, detailing the technical specifications, tendering process and bid documentation, and benchmark costs for good and services. The SLICs will take responsibility for a l l operational decisions, including short-listing o f vendors, finalizing the tender documents for competitive bidding, bid evaluation, award o f contracts, etc., with inputs f rom the SCBs. The SCBs will s ign the final procurement contracts. NABAFW will act as the payment agent and wil l make direct payments to contractors/ vendors on the basis o f written instructions received from SLIC and SCB. NABARD will ensure that sufficient expertise in IT related procurement (for Component 11) i s made available to al l the SLICs. An Act ion Plan to mitigate procurement risks, which are related primarily to IT procurement, has also been developed (see the r isks matrix below and Annex 8).
5 1. The Capacity Building TA and Implementation components (Components I and IV) will involve procurement o f consultancies and training, and will be carried out by NABARD. In the case o f high value training, which can be provided by private sector institutions, procurement wil l be done following Consultant Selection guidelines. However, most o f the modules envisaged under the project's capacity building TA program for CCBs will require NABARD to engage Specialized Cooperative Training Institutes, as there i s n o comparable expertise available elsewhere. NABARD/SCBs wil l s i g n Training MoUs with these Institutes (Annex 8).
52. An Implementation Manual (IM) acceptable to the Bank has been prepared and adopted by MoF, NABARD and other implementing agencies, as applicable. The IM includes, inter alia, the agreed FM and disbursement arrangements; procurement guidelines; guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits (dated October 15,2006); and a detailed framework for the continuous measurement and monitoring o f outcomes (Annex 3), that will be a key element in ensuring effective implementation.
53. Arrangements have been put in place to ensure intensive project supervision, covering FM and procurement aspects, with three annual supervision missions. The supervision team wil l draw o n expertise f rom the Bank, as wel l as external experts. The concerned development partners will meet regularly to facilitate effective coordination and communication.
54. Fundsflow. All project funds will f l ow f rom Go1 (as grants) through NABARD. In l ine with the Go1 Package, once the M o U has been signed, the PS receives funds to carry out the SAs. Funding for the SAs can f l ow to a state as soon as it signs the M o U ; al l other funds for implementing activities under Component IV would begin to f low upon project effectiveness. Funds for implementing activities under Components I&II would f low only after the CSA has been revised by the PS. Finally, recapitalization
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funds to implement Component I11 would f low to CCBs, based on the achievement o f agreed benchmarks, as specified in the Go1 Package and the MoUs, and summarized above.
55. With respect to Components I, I1 and IV, the expenditure would be directly incurred by NABARD for the purchase o f goods and services to be financed by these components o f the project. For the FRS (Component 111), al l project funds will f l ow from Go1 through NABARD to the CCBs. Once the SAs for al l the eligible PACS under a given D C C B have been completed, the net payment to the PACS will be calculated after setting-off their overdue liabilities to the DCCB. At that point, the payment to the concerned PACS and D C C B wil l be credited into their accounts. After the SAs o f a l l DCCBs in a state have been completed, payments due to the DCCBs/SCBs can be calculated on the basis o f dues from each DCCB, and the SCB would then receive i t s payment. It may be noted that a l l payments in respect o f a l l components/activities under the project will be made by NABARD, so that the expenditures wi l l be captured in NABARD’s accounting system (Annex 6, 7).
56. Bank-financed project funds allocated to Components I, I1 and IV will be disbursed on the basis o f interim unaudi ted financial reports (IUFRs) evidencing actual expenditures, on the various components and activities o f the project. Funds allocated to Component I11 (FRS) wil l be disbursed on the basis o f actual transfers made to CCBs in accordance with OP/BP 6.0, and reported in the IUFRs under two sub-categories, based o n the two sets o f benchmarks, as defined above. The f i r s t category o f FRS funds (75 percent o f recapitalization support) will f low to the CCBs once the in i t ia l set o f benchmarks i s met; the second category o f FRS funds (25 percent o f recapitalization support) will f low to the CCBs after the second set o f benchmarks i s met (Annex 6, 7).
57. An init ial advance o f U S $ 100 mi l l ion will be provided to Go1 to meet the expected expenditures in the f irst four months o f the project (with a provision to increase this limit if necessary to US$ 150 million). Whi le IUFRs will be submitted on a quarterly basis, Go1 would have the flexibil i ty to seek reimbursement earlier than the quarterly intervals by submitting reports for shorter periods. The disbursement percentage for al l project components wi l l be set at 80 percent o f the gross expenditures &e., 80 percent o f GoI’s share) as reported by NABARD/ Go1 through the IUFRs. This i s based on the expected relative contributions o f the Bank and Go1 in the states where Bank funds would be deployed. Retroactive financing up to an amount o f U S $ 50 mi l l ion will be made available for a l l categories o f eligible expenditures incurred after August 1, 2006.
3. M o n i t o r i n g and evaluation o f outcomedresults
58. As noted above, the NIMC will provide overall policy and guidance for overseeing monitoring and implementation. A strong monitoring framework to track inputs, outputs and outcomes in a systematic and timely fashion has been developed and agreed with Go1 and NABARD (Annex 3). Project outcomes and outputs will be monitored via project supervision using administrative data f rom several sources. This effort will be supported through the project (Component IV). In addition, an independent long-term impact evaluation wil l be carried out in three states to directly assess the degree to which the project meets i t s higher level development objective. The design o f the evaluation ensures a well-defined treatment and control group. The baseline survey o f PACS and households has been initiated. In addition to the baseline survey, the assessment in each state will use two fol low up surveys. Examples o f indicators that this impact evaluation wi l l track include increased membership o f small and marginal farmers in the CCS, improved access to credit across agricultural seasons, and improved livelihoods o f small and marginal farmers.
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4. Sustainability
59. GoI’s strong commitment and ownership o f the reforms to be supported by the project are clear f rom the efforts that have gone into designing the Package; building the necessary political consensus for implementation, particularly with State Governments; and mobi l iz ing the sizeable resources required to finance the reforms. Over a relatively short time span (since the reforms were announced in January 2006), Go1 has managed to secure the commitment o f several states to implement far-reaching reforms that entail ceding control o f the CCS. Furthermore, participating states and participating CCBs will make upfront financial contributions to project costs; this strengthens their ownership o f the project’s objectives.
60. The project has been designed with an eye to ensuring longer t e r m sustainability o f outcomes. Indeed, the project addresses the key legal and regulatory constraints that hamper the governance and operations o f CCBs; includes measures to strengthen the managerial and technical capabilities o f CCBs, along with staff and management rewards and incentives for better perfonnance16; and also includes efforts directed at networking, cost pooling and risk diversification, which are critical to enhancing cost reduction and longer-term commercial viability o f CCBs (Annex 9).
61. Furthermore, complementary measures will be introduced to address other factors, such as agricultural failures, which could lead to renewed increases in nonperforming loans o f CCBs, and jeopardize the project’s sustainability. In this context, i t may be noted that Go1 i s already implementing reforms o f the agricultural insurance system and catastrophic risk mitigatiodmanagement. Demand-side measures, such as marketing support for small and marginal farmers as they diversify their economic activities into new areas, are also being implemented by Go1 and State Governments, with assistance from the Bank in some states.”
5. Critical risks and possible controversial aspects
62. The rewards from the successful implementation o f this project are substantial, but the risks, too, are high. The fol lowing important risks-that need to be addressed to ensure that project objectives are achieved and i t s impact i s sustained-have been identified, along with risk mitigation measures that have been agreed with Go1 and NABARD:
Risk Factors
1. I Political economy risk
I
Description of risk
A key risk arises from the fact that many CCBs have long been the victims o f ‘capture’ by local politicians and State Governments. T h i s i s manifested in the lending decisions o f CCBs, as also, in their use by GoIIState Governments as vehicles to
Ratinga of risk
H
Mitigation measures
The project wi l l address these risks through the following mitigation measures: (a) Upfront 1egalIregulatory reforms that wil l:
tighten banking oversight o f SCBsIDCCBs by transferring the regulation from State Governments to the Reserve Bank
Ratinga
residual risk
o f
S
l6 To incentivize good performance, NABARD has issued instructions linking i t s regular refinancing o f the CCBs to acceptance o f reforms under GoI’s package.
T h e Bank i s supporting such measures through its rural poverty reduction and livelihoods projects in states such as Andhra Pradesh, Madhya Pradesh, and Rajasthan, and shortly, in Bihar, Orissa and Tamil Nadu. In Gujarat, IFC i s providing such support through the S e l f Employed Women’s Association’s (SEWA) Trade Facilitation Centre.
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Implementation capacity
Financial Management
grant temporary re l ie f to distressed farmers (by waiving interest on loans to farmers made by PACS and/or imposing interest rate caps on PACS’ lending) in the face of catastrophic events, such as floods or drought. T h i s could pose a serious risk to the sustained recovery of PACS, and jeopardize the PDO and longer-term impact.
T h e risk that NABARD may not have adequate capacity to perform i ts functions as the project main implementing agency.
The risk here arises from the limited capacity of the lowest tier entities (PACS) to undertake payment functions, maintain accounting records, and fulfill financial reporting requirements, needs to be recognized.
S
H
~
of India;
ownership/control of CCBs and help democratize these institutions; specifically, the new law (CSA) (which i s a starting point for the reforms) will limit State Government ownership in CCBs; minimize State Governments’ participation on the Boards o f CCBs and limit powers of State Governments to supersede the Boards of CCBs; ensure timely elections; and grant full voting membership rights for all users o f financial services;
(b) The project builds in covenants that require Go1 to ensure that the Project i s carried out in accordance with prudent financial, banking and economic polices, and to ensure that full autonomy i s provided to the CCBs in all financial and internal administrative matters, set forth in the Go1 Package and the MOU. (c)Any loan waiverdinterest caps will be accompanied by upfront financial compensation to the CCBs through the budget o f the responsible government; (d) A strong focus on ‘bottom up’ monitoring by the project’s targeted beneficiaries. T h i s will draw on successful experiments with social mobilization in India (e.g., the Andhra Pradesh rural poverty reduction project) and elsewhere. NABARD has set up a new department (DCRR) to oversee and implement the project. DCRR staff i s competent and committed. To fill any capacity gaps, support will be provided to NABARD in selected areas under the project. Furthermore, the project’s implementation structure i s such that key implementation responsibilities are shared by the SLICs, which will also receive capacity building support, as required. Under the project, the F M function will be largely performed and coordinated by NABARD, and role o f the PACS will be limited. NABARD’s existing FM system can provide the Bank with reasonable assurance, and accurate and timely information, on the status o f the project and use o f Bank funds.
minimize State Governments’
Nevertheless, there i s a clear need to strengthen the FM, accountability and corporate governance arrangements for the PACS. T h i s will be achieved over the project period by implementing an
M
S
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Procurement
Reputational risk for the Bank
The key procurement risk under the project arises from its I T component, which will be spread across a large number of institutions at various tiers o f CCBs. The SLICs, which will be responsible for key operational and technical decisions related to I T procurement, currently have limited capacity in this area.
The key source o f reputational risk for the Bank i s that the project involves supporting the CCBs, which do not have a good track record.
FM capacity building program, included under Component I & 11. A linkage will be built with the MIS at the DCCB-level to compile and report the necessary PACS-level information. Sample ex-post audit checks will be conducted to verify the use of funds. NABARD will be responsible for ensuring compliance with the agreed procurement procedures, and will also ensure that sufficient expertise in IT related procurement i s made available to all the SLICs. An action plan to build the capacity o f SLICs in IT-related procurement has been agreed. T h i s will include building up SLIC’s expertise in preparation of bidding documents, preparation o f tender notice, invitation for bids, receipt, opening, and evaluation o f bids, finalizing o f the contract, and the administration o f contract To achieve this, NABARD and the PS will use the services o f I T experts.
An initial workshop to familiarize the SLIC members in procurement processes will be arranged by the Bank in June 2007; this will be followed up by continuous capacity building support to be provided under the project’s Component IV.
Implementation of the action plan will be reviewed after six months to assess the need for further capacity building efforts.
In addition, an Action Plan to mitigate procurement risks has been developed (Annex 8). The above-noted risk mitigation measures to strengthen the project’s design and implementation arrangements should help ensure that the project i s a success. T h e strengthened role of RBI in regulating SCBs and DCCBs, and o f NABARD in setting the prudential norms for PACS, will act as a further risk mitigant. The projects design and implementation arrangements have benefited from international best practices. T h e project incorporates a robust M&E framework, with an emphasis on full information disclosure, and continuous self- monitoring by beneficiaries, which should further help ensure project success and mitigate reputational risks for the Bank. Strong country ownership for the project at all levels i s another important factor worth mentioning.
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Size, complexity, and coordination
Risks arising from factors beyond the projects immediate control
The size and complexity o f the project, and the many players involved, w i l l make implementation and supervision a challenge.
Other factors, such as agricultural failures, could lead to renewed increases in nonperforming loans o f CCBs, thereby eroding the project’s benefits and jeopardizing sustainability.
Project implementation arrangements and supervision plans have been carefully worked out to balance simplicity with rigor, and provide the Bank with an adequate role in supervision, while maintaining GoI’s strong ownership o f the project. Furthermore, the concerned development partners will meet regularly to facilitate effective coordination and communication to take stock o f implementation and results. The Implementation Manual, which includes, inter alia, a detailed framework for the continuous measurement and monitoring o f outcomes, will be a key element in ensuring effective implementation and supervision. As a result o f the proposed project, the CCBs would have stronger balance sheets that would be able to better absorb a sudden increase in non- performing loans (NPLs). Furthermore, Go1 i s already implementing reforms o f the agricultural insurance system and catastrophic risk mitigation/ management, with the aim to improve farmers’ income security. T h i s i s being supported b y the Bank through non- lending TA. Demand-side measures, such as marketing support for small and marginal farmers, as they diversify their economic activities into new areas, are also being implemented by Go1 and State Governments, wi th assistance from the Bank (in some states).
111. Overall Risk
aRating o f risks on a four-point scale according to the probability o f occurrence and magnitude o f adverse impac
M
S
S
H igh (H); Substantial (S); Modest (M); L o w or Negligible (N).
6. L o a d c r e d i t conditions and covenants
63. Covenants applicable to project implementation are as follows:
(a) GOI, NABARD and the PS, as the case may be, shall maintain the DCRR, NIMC, SLICs, D L I C s with adequate powers, functions and resources;
(b) NABARD shall implement the project in the PS in accordance with the provisions o f the M o U entered into between GOI, NABARD, and each such PS, and in accordance with the Implementation Manual (IM) agreed with the Bank;
(c) NABARD shall ensure that PS PACS, DCCBs and SCBs issue Letters o f Undertaking, satisfactory to the Bank, for carrying out their respective activities under the Project, in accordance with the Go1 Package, the MoU, and the Implementation Manual;
(d) Go1 shall, based o n the M o U and the Letters o f Undertaking, provide funds to CCBs to be uti l ized for recapitalizatiodloss reduction under arrangements satisfactory to the Bank;
(e) NABARD shall monitor progress o f the project in accordance with indicators satisfactory to the Bank:
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( f ) The mid-term review o f the project shall be carried out in July 2009; (g) Disbursement for recapitalization (under Component 111) wil l be provided in two portions,
subject to fulf i l lment o f key benchmarks as set out in the Go1 Package and detailed in the MoUs;
(h) The Project Implementing Entity (NABARD) shall, within one month o f effectiveness, adopt the design of, and the implementation strategy for, the common accounting, M I S and internal control systems, satisfactory to the Bank, to be implemented by the CCBs pursuant to the respective Letters o f Undertaking;
(i) The Project Implementing Entity shall implement the action plan to strengthen the procurement capacity required for Component I1 o f the Project, and ensure that SLICs have undertaken adequate measures to fully implement such a plan;
0) The Go1 will ensure that the Project i s carried out in accordance with prudent financial, banking and economic polices, and will ensure that full autonomy will be provided to the CCBs in al l financial and internal administrative matters, set forth in the Go1 Package and the MOU;
(k) The Go1 will undertake to suspend or terminate the right o f the PS to use Credit/Loan proceeds, or obtain a refund o f al l or any part o f the amount o f the CreditILoan withdrawn if the PS or the CCBs fail to perform their obligations under the MOU or the Letters o f Undertaking.
D. APPRAISAL SUMMARY
1. Economic and financial analyses
64. Economic Analysis. The viabil ity o f India’s CCS i s undermined by a combination o f factors, which wi l l be addressed through the project. One key set o f problems relate to poor governance and polit ical interference and the absence o f an adequate legal and regulatory framework. These will be addressed through the reform program outlined above, which i s an integral part o f the Go1 Package, to be supported through the project. A second set o f problems relate to operational capacity weaknesses in the CCBs, which will also be comprehensively addressed through the project’s f irst two components. Third, there are some fundamental economic reasons that have constrained the viabil ity o f CCBs, and these include: (i) their inabil ity to capture economies o f scale sufficiently to provide affordable financial services to the poor; and (ii) their inabil ity t o diversify r isks adequately (as they operate in small geographic areas). These problems are not specific to India; they are faced by financial cooperative around the world. Drawing on cross-country experience, and especially on the Mexican experience, the project will include a strong focus on cost reduction through promoting networking and ‘cost pooling’, by providing CCBs (in a centralized manner) with a wide array o f services (IT, legal, accounting, regulatory compliance, TA, liquidity management, etc.) that are subject to economies o f scale; these initiatives wi l l also be supported through the project’s f i r s t two components. Efforts will also be made to gradually promote risk diversification; the consolidation that i s expected over time should help reduce the geographical concentration o f the credit risk exposure o f PACS. In the medium to longer run, a market for credit risk swaps could be developed.
65. By transforming the CCBs into more effective, efficient and commercially sustainable providers o f financial services, the project will help the poorest households in rural India-the small and marginal farmers-to access formal financial services more readily, increase the amount o f financing available f rom the formal sector, reduce borrowing costs, and reduce dependence on moneylenders, who tend to charge exorbitant rates o f interest. Over a five year period, it i s expected that the number o f small and
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18 marginal farmers receiving credit f rom CCB’s would increase by over 50 percent (to 22 million). Furthermore, the team’s analysis indicates that, by strengthening PACS and their upper tiers, the project would result in a 70 percent increase in the volume o f CCBs’ credit outstanding over a five year period. The reforms, coupled with the proposed investments in institutional capacity building and IT, would help improve PACS’ efficiency and services, over time. All this should enable small and marginal farmers to substitute borrowing from moneylenders (at rates in the range o f 36 to 120 percent per annum) with formal borrowing from PACS (at rates o f about 12 to 13 percent). Access to cheaper and more plentiful credit wi l l provide small and marginal farmers not jus t the immediate resources necessary for consumption spending, but also, over time, financing for productive investments that can contribute to the diversification o f their economic activities, thereby increasing incomes and improving livelihoods.
66. Beyond credit, support provided under the project’s f i rs t two components will also help the CCBs provide a wider range o f financial services, such as savings, money transfer, insurance, etc. to small and marginal farmers. Better access to these services would help these households protect themselves against periods o f l o w income or unexpected fluctuations in income (for example, caused by drought or crop diseases), and help to maintain consumption standards (through the accumulation o f financial saving^).'^ Improved access to finance could thus have significant longer term welfare implications.
67. Finally, while the project involves a substantial stream o f expenditures over the next three to five years, creating a sustainable and viable CCS would reduce the future fiscal burden for GoI. First, the Government’s insistence on transformation o f the legal, regulatory and governance frameworks o f the CCS as a precondition for the provision o f FRS would help minimize the risk o f having to ba i l out the CCS again in the future, as i t has done repeatedly in the past, due to the failure o f previous programs to address the fundamental problems constraining the system. Second, postponing the reforms and recapitalization would only add to the final costs o f restructuring the CCS (because operating and credit losses would continue to accumulate), with an adverse impact o n access to rural finance in the interim. Third, as discussed above, the alternative o f liquidating the CCS would involve substantial financial and polit ical costs, as wel l as social and economic dislocation costs that are deemed to be untenable as compared to the costs o f the Go1 Package (Annex 9).
68. Financial Analysis. The impact o f the FRS on CCBs will be to restore their solvency, enable them to achieve sustained profitability, and significantly improve their abil ity to attract additional financial resources for intermediation through the PACS to farmers. The team’s analysis f rom a sample o f ten weaker than average DCCBs selected from states that have joined the Go1 Package to date shows that, over a five year period, fo l lowing receipt o f financial assistance in 2007, the DCCBs’ C R A R should rise f rom an average o f minus 0.88 percent to 9.08 percenta2’ In the same timeframe, return o n assets (ROA) should show consistent improvement, rising f rom 0.07 percent to a 1.46 percent by the end o f the period, providing a good indication that the DCCBs will be able to achieve sustained profitability. The dramatically improved CRAR and profitability o f the DCCBs should enable a substantial increase in their lending (by over 100 percent over five years), leveraging the amount o f assistance provided by about 10 times. The FRS i s thus expected to have the effect o f providing a decisive halt in the present downward
l8 The total membership of PACS i s currently 127 million people; o f these, some 47 million are small and marginal farmers, o f whom, around 15 million currently access credit. l 9 The role o f savings and borrowing in protecting consumption against unexpected shocks, first discussed by Milton Friedman (1 957) in the ‘permanent income hypothesis’ has since been extensively tested empirically.
The analysis uses conservative assumptions: (a) financial performance has been projected on the basis that credit quality will improve less quickly than the improvement seen in the period 2003 to 2005; in reality, the dramatic changes in the governance of DCCBs and PACS which the legal reforms will bring, reinforced by improved management, training, and new and lower cost (due to pooling of facilities) IT systems, should enable the DCCBs to improve credit quality at a faster rate; and (b) the analysis assumes that DCCBs’ financial spreads will remain about the same.
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spiral o f the DCCBs, and restore them to sustainable financial health. On a systemic basis, the analysis indicates that the FRS would result in increased lending by about 11 1 percent, leveraging the amount o f assistance provided by about 23 times. The benefits are even higher when the positive impact o f assistance provided directly to PACS by the FRS i s incorporated (Annex 9).
69. Conducting a standard net present value (NPV) and internal rate o f return (IRR) analysis for the project i s not straightforward. However, i t i s possible to estimate both losses and benefits at the level o f the DCCBs (where the data i s also more recent) which, given their role as the primary source o f refinance for the PACS, provides a reasonable proxy for the l ikely impact o f the Go1 Package as a whole. For the sample o f 10 weaker than average DCCBs drawn f rom the eight states that have signed so far, the NPV i s estimated at Rs. 870 mi l l ion and IRR at 3 1 percent. These numbers provide a high degree o f confidence that the project as a whole will generate very positive rates o f return in purely financial terms (Annex 9).
2. Technical
70. The project’s technical design has benefited f rom an extensive body o f analysis, including the GoI’s o w n analysis, and Bank ESW and lending operations. The approach taken has also benefited f rom international experience with credit cooperative restructuring in countries such as Canada, Mexico, the Netherlands and US, including the lessons learned from similar Bank projects in countries l ike Mexico. The key principle underlying the project’s technical design i s that the one-time recapitalization o f potentially viable CCBs, while necessary, i s not a sufficient condition for their revival on a sustainable basis, and must be accompanied by fundamental improvements in the legal and regulatory framework to address the governance and operational constraints currently experienced by al l three t iers o f the system, together with improvements in the managerial and technical capabilities o f CCBs, and support for more effective networking and cost pooling. The project’s design ensures that these various components are implemented as an integrated package, and sequenced in a manner that ensures that any financial infusions are contingent upon the fulf i l lment o f critical legal, regulatory, and institutional reforms. This should help ensure sustainable improvements in the CCS, and minimize the risk o f scarce public resources being wasted on entities that are not committed to, or capable of, reforms.
3. Fiduciary
71. NABARD will be responsible for implementing the agreed FM arrangements for the project. The FM assessment carried out by the Bank found that NABARD’s existing FM system, with adequate enhancements and linkages with M I S at various tiers, will have the capacity to provide the Bank with accurate and timely information on the status o f the project and use o f Bank funds. The FM capacity o f CCBs in a l l three tiers will be strengthened through TA provided under the project’s Component I (Annex 7 ) *
72. All expenditures under Components I, I1 and IV will be incurred by NABARD and will, therefore, be captured within NABARD’s accounting system. Funds for Component I11 (FRS) wil l be transferred by NABARD to the CCBs, and the net amounts due to them will be clearly identified. There will be a need to build a linkage with the M I S at the DCCB-level, to provide reconciled statements with information on recapitalization funds received by PACS; this will be supported through TA under Component I.
73. NABARD will report to the Bank the financial progress under the project on a quarterly basis by submitting interim un-audited financial reports (IUFR)--in the agreed format that will provide evidence on the actual end-usage o f funds in respect o f Components I, I1 and IV, with adequate supporting documentation. Transfers in respect o f Component I11 wil l be tracked by NABARD along with a l i s t o f CCBs that have received the (net) recapitalization finds due to them, and wil l be reconciled with actual
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funds flow. The project will be subject to bi-annual external audits, in the f i rst two years, which will be conducted by statutory auditors who are acceptable to the Bank, based o n terms o f reference agreed with the Bank. After the f i rst two years, annual financial audits o f the project will be undertaken*’. Sample audit checks would be conducted (ex-post) to verify the use o f funds (Annex 7).
74. The project will require NABARD to undertake significant procurement o f goods and services under Components I, I1 and IV. Procurement o f Bank-financed goods and services will be undertaken in accordance with the Wor ld Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated M a y 2004; and “Guidelines: Selection and Employment o f Consultants by Wor ld Bank Borrowers” dated M a y 2004, and the provisions stipulated in the Legal Agreement (Annex 8).
75. Whenever procurement under a specific tender exceeds US$2 mill ion, i t will be subject to International Competitive Bidding (ICB), as per the Bank’s ICB procedures and Standard Bidding Document for procurement o f goods under ICB. NABARD’s tendering process and bid documents for National Competitive Bidding (NCB) have been reviewed by the Bank and found to be in line with the guidelines and requirements o f the Central Vigilance Commission o f India, and similar to the Bank’s guidelines and requirements, the main difference being that NABARD follows a “two envelope system”. NABARD‘has confirmed that procurement under the two envelope system will be carried out such that: (a) the technical and financial bids are opened in public; (b) the price bids are kept sealed at a safe place; (c) the date for opening o f the technical envelope i s indicated in the bid documents; and (d) bidders who qualify, and have a responsive bid, are invited for the public bid opening o f their price bids, while those who do not qualify are given one week to request a review.
76. T o ensure consistency in the IT procurement approach followed across states, NABARD has issued detailed guidelines, covering technical specifications, tendering process and bid documentation, benchmark costs for goods and services to be procured, and payment and funds f l ow arrangements. A revised 18-month procurement plan covering Components I, I1 and IV, and reflecting the states’ own TA and IT deployment plans and cost estimates, has been agreed with NABARD (Annex 8).
77. A procurement assessment identified the need to enhance the procurement capacity o f SLICS, with a particular focus on the procurement o f IT equipment under Bank-financed projects. NABARD will ensure that sufficient expertise in IT related procurement (for Component 11) i s made available to al l the SLICs. This will cover support to SLICs to build up the required expertise in the preparation o f bidding documents, preparation o f tender notice, invitation for bids, receipt, opening, and evaluation o f bids, finalizing o f the contract, and the administration o f contract which, besides other things, include ensuring compliance with the contract conditions, payment terms, variations, dispute resolution, monitoring etc. T o achieve this, NABARD and the PS will use the services o f IT experts, for example, f rom the State IT departments and the National Informatics Center Services Inc. (NICSI), who have the necessary experience in IT procurement. These efforts will be supplemented by training o f SLIC members. An ini t ia l workshop to familiarize the SLIC members in procurement processes will be arranged by the Bank some time during June 2007; this will be followed up by continuous capacity building support to be provided under the project’s Component IV. The support will be reviewed after six months o f implementation to assess the need for further capacity building efforts. Additional procurement capacity building support will also be provided through the project (Component IV) (Annex 8).
4. Social
78. N o specific social safeguards issues have been identified at present.
*’ The existing NABARD auditors are acceptable to the World Bank.
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5. Environment
79. The activities supported by the project are not l ikely to cause any significant adverse environmental impacts and none o f the safeguards are l ikely to be triggered. Hence, the project i s designated in ‘Category C’ for environmental screening where the responsibility for (potential future) safeguards review and clearance has been transferred to the Sector Unit.
6. Safeguard policies
Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP 4.0 1) [ I [XI Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Physical Cultural Resources (OP/RP 4.1 1 ) [ I [XI Involuntary Resettlement (OP/RP 4.12) [ I [XI Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/Bf’ 4.36) [I [XI Safety o f Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP 7.60)” [I [XI Projects o n International Waterways (OP/RP 7.50) [I [XI
* By supporting theproposedproject, the Bank does not intend to prejudice theJinal determination of the parties’ claims on the disputed areas
7. Policy Exceptions and Readiness
80. The project requires n o policy exceptions. Assessments and preparation o f fiduciary arrangements, staff and consultant selection, M&E systems, and implementation and procurement plans have been finalized and have been found to meet the regional criteria for readiness o f implementation.
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Annex 1: Country and Sector or Program Background
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
Financial Sector Reforms over the Past Decade: A Summary
A well-functioning financial system i s central to meeting the challenge o f sustaining India’s economic growth at above 8 percent a year, accelerating growth, and reducing poverty. Indian pol icy makers recognize that continued financial reforms are critical for mobil izing the longer term savings necessary to meet the country’s investment needs, including the much-needed longer-term investments to finance the region’s vast “infrastructure deficit.” Moreover, there i s a growing appreciation that finance can play a v i ta l role in making growth more inclusive; by extending the range o f individuals who can get a foothold in the formal economy, finance can help India’s poor to catch up with the economy as it grows, share in the benefits o f growth, and climb out o f poverty. The role o f finance as a ‘growth-accelerator’ and ‘growth-equalizer’ i s supported by solid cross-country analysis, which shows that well-functioning financial systems are associated with more rapid and inclusive growth. 22
Since the early 1990s, India has introduced impressive financial sector reforms that have proceeded steadily, albeit gradually. Interest rates have been mostly liberalized; capital markets have been substantially deregulated and restrictions on capital inf lows eased;23 private entry has been allowed into banking, mutual funds and insurance; banks’ required holdings o f government debt have been reduced, and the burdens o f priority sector requirements eased.
As a result o f the reforms since the early 1990s, India’s financial sector has changed, in some respects, beyond recognition. The depth and liquidity o f India’s capital markets have increased significantly since the 1990s, with equity markets booming (Table 1.1); the share o f capital markets n o w exceeds one-half o f financial sector assets.
Table 1.1 India: Selected indices of stock market development (Selected years, 1991-2006)
1991 1993 1999 2001 2003 2004 2006 Listings 2556 3263 5863 5795 5664 5593 4793 Market Capitalization ( percent o f GDP) 16.6 34.8 41 22.8 45.9 49 85 Turnover ( percent o f market capitalization) 57 27 193 191 139 101 79
Source: Standard & Poor’s
Whi le the banking sector continues to play an important role in the financial system and remains overwhelmingly government-owned, i t has seen some fundamental changes: prudential norms have been tightened, bank capital bolstered, the supervisory systems strengthened, and competition has increased. The share o f private and foreign commercial banks in total financial sector assets has more than doubled in the past decade (even if state-owned banks continue to dominate, accounting for about 70 percent o f total banking sector assets) (Table 1.2). Government domination o f the insurance and mutual funds industries i s also in decline.
22 See, for example, Beck, Demirguq-Kunt and Levine (2004), op.cit; Honohan (2004), op.cit. 23 Further steps to liberalize capital controls may be on the horizon pursuant to the Tarapore Committee Report on Fuller Capital Account Liberalization, July 2006.
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Table 1.2: India: Structure of the Financial Institutions 1994-2005 (Selected years, percent o f total assets)
Public Public Sect. Private Private Sect. Cooperative Public Private Total Sector Te rm And Term banks and Sector Sector
M a r c h Banks’ Lending Inst. Foreign Banks Lending Inst.* NBFC (dep.) Insurance Insurance (Rs. Bil l ion)
1994 55.2 12.8 7.9 2.7 12.6 8.9 0.0 7,091 1999 49.8 10.6 11.2 4.0 14.9 9.6 0.0 16,185 2001 50.8 9.1 12.5 4.0 13.2 10.5 0.0 2 1,265 2003 52.0 7.9 15.9 0.7 12.6 11.0 0.2 26,069 2004 52.4 7.5 17.1 0.7 12.2 9.7 0.3 29,411 2005 53.4 3..9 16.8 1.2 11.3 13.1 0.4 34,677
Source: RBI Trend and Progress in Banking, various years. Notes: 1. Includes the RRl3s; 2. HDFC and ICICI (in 2002, ICICI was merged with ICICI bank and ceased to exist as a term lending institution).
India has managed to achieve an impressive rate o f financial savings, significantly higher than in many other large emerging market economies. Despite i t s much lower per capita income, India’s financial assets, at wel l over US$l trill ion, are higher than in countries l ike Brazil, Indonesia, or Mexico. The share o f financial assets in GDP in India i s about 173 percent, compared to 104 percent in Mexico, 112 percent in Indonesia, and 157 percent in Brazil, a l l o f which have significantly higher per capita incomes than India. Moreover, India’s financial liberalization o f the 1990s was not followed by a major financial crisis, unlike in many other countries. India’s financial system i s in fact more robust today than at the start o f the reforms; one indication o f this i s the speed with which the Indian financial markets were able to recover f rom the May-June 2006 emerging markets turbulence.
The Challenge of Rural Finance Reforms
While the reforms o f the 1990s have meant that India’s growing middle- class has access to a range o f increasingly sophisticated financial institutions, products and services, rural dwellers s t i l l have very limited access to finance from formal sources, l ike commercial banks or cooperative banks. According to a recent Wor ld Bank survey24, some 59 percent o f rural households do not have a deposit account and 79 percent have n o access to credit f rom a formal source. The problem
o f access i s particularly severe for small and marginal farmers (the poorest group among rural dwellers, who own up to 4 acres o f land). Some 87 percent o f marginal farmers and 70 percent o f small
Figure 1.1 Access to Finance - RFAS 2003 (percentage)
100.0 1 87.0
80 0
60 0
40 0
20 0
0 0 Marginal Small Large Commercial Others Total
W NO credit account UNO savings account
Note: Marginal farming households=landholding<l acres; Small=l to 4 acres; Large farmers=>4acres; Commercial households= with or w/o land but wi th income from non- farm sources exceeding half o f total household income; Others=mixed households with land and non-farm commercial incomes but the latter being less than half o f their total household income. Source; World Bank (2004)
farm-ers have n o access to credit f rom a formal financial institution; 70 percent o f marginal farmers and 451 percent o f small farmers have n o deposit account in a formal financial institution (Figure 1.1).
24 World Bank (2004), op.cit.; Basu (2006), op.cit.
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In the absence o f formal finance, small and marginal farmers have had to rely heavily o n moneylenders, who tend to charge exorbitant rates o f interest, ranging f rom 36 percent to 120 percent a year. At such interest rates, the rural poor risk fall ing into a debt trap f rom which recovery seems only a very distant prospect. The recent r i se in farmer suicides in states l ike Andhra Pradesh and Maharashtra i s one manifestation o f this growing problem o f indebtedness in rural India.
Government of India’s Strategic Thrusts for Rural Finance Reforms
Against this background, rural finance reforms designed to improve access to finance for the poorest groups (small and marginal farmers) have emerged as an important priority for the Government o f India (GoI). The strategy has three major thrusts:
First, increasing competition among the various providers o f rural finance (rural branches o f commercial banks, RRBs, the cooperative credit institutions, microfinance institutions, etc.). After a slow take-off, policies to promote competition among rural finance providers have gathered pace in the last year or so. Notably, with a lowering o f restrictions on branch licensing in rural areas, and a recently announced pol icy that allows banks to operate through ‘correspondents’, private players have begun to expand their rural operations, resulting in greater competition. Many o f the restrictive provisions o f the ‘service area’ approach, which l imi ted competition among bank branches in rural areas by allowing banks to operate only in pre-allocated ‘service areas’ o f about 15-20 villages per bank branch, have been revised. A number o f measures to facilitate the expansion o f microfinance have also been announced over the past two years. Measures have also been announced that provide market-based incentives for banks to lend to MFIs, and promote partnerships between commercial banks and MFIs. A microfinance law, designed to provide a better pol icy and regulatory framework for the sector, i s being finalized.
Second, developing products for the better management and mitigation o f r i sks in rural finance, with a focus on: (i) revamping the agriculture insurance system to provide improved coverage o f the r isks faced by small and marginal farmers (this i s being supported through a Bank technical assistance); (ii) fostering partnerships between government and private sector to pi lot weather-index insurance, which can be a good way for farmers to hedge businesses against imponderable weather r isks (scaling up weather insurance pilots and improving product design i s also being supported through the Bank technical assistance); (iii) developing a negotiable warehouse receipt system, which allows farmers to use their crops as collateral for post-harvest financing, thereby potentially reducing default risk and improving the access o f small and marginal farmers to formal financing (a Warehousing Bill has recently been introduced in parliament); and (iv) efforts to develop the commodities futures markets, which would allow better price discovery and make an important contribution to addressing the risk o f fall ing commodity prices, which i s among the main sources o f farmer default. A model act that has been recently formulated as a template to reform agricultural produce marketing legislation at the state level i s a step in the right direction; the act could make an important contribution to fostering a single national market for agricultural commodities.
Third, reforming rural financial institutions (RFIs) so that they are better positioned to provide financial services small and marginal farmers. While India’s rural finance landscape features a variety o f R F I s (see B o x l.l), the immediate focus i s on reforming the CCBs, which have the largest network among al l types o f rural financial institutions in India and potentially the deepest outreach. India’s CCBs comprise 108,779 PACS, 367 DCCBs and 31 SCBs. Fol lowing years o f polit ical interference, poor governance, weak regulation and supervision, and inadequate management capacity, a very large number o f these institutions are severely impaired, and cannot provide financial services to the poor o n a
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commercially sustainable basis. Accumulated losses were estimated at Rs. 9,277 crores (US2 .24 billion).25
Box 1.1 India’s Rural Finance Landscape
India has a range o f rural financial service providers, including formal sector financial institutions at one end o f the spectrum, informal providers (mostly moneylenders) at the other end o f the spectrum, and between these two extremes, a number o f semi- formal/microfinance providers. In terms o f sheer size and spread o f operations, the formal rural finance institutions dominate the rural finance landscape. In 1981 the National Bank for Agriculture and Rural Development (NABARD) was established as an apex institution to facilitate agricultural credit, and, in 1991, the Small Industries Development Bank o f India (SIDBI) was set up to cater to the needs to small enterprises and provide refinance to state level financial institutions.
The formal RFIs include: Cooperative credit banks: India also has a vast network o f rural cooperative credit banks (CCBs), wi th a three tiered structure at the state, district and village level (see below also). There are some 14,000 branches o f rural cooperative banks and more that 108,000 grass roots level retail outlets o f Primary Agriculture Credit Societies (PACS), which are used b y the cooperative system as channels for funds flow. While having the largest and most widespread retail network, the share o f these institutions in agriculture credit has been declining steadily particularly over the last 15 years, and now stands at one third, ha l f the level it was 15 years ago;
Rural branches o f commercial banks, mostly public sector banks (but also some private sector banks); T h e post office system adds to the physical service point network o f the country with more than 154,000 post office branches handling more than 110 mi l l ion money orders and administering over 150 mi l l ion savings accounts. However, credit transactions are not handled through this network; Insurance companies have a moderate reach in rural areas, though this i s gradually increasing.
Regional rural banks;
Semi-formal/microfinance sector. W h i l e India i s home to many microfinance innovations, in terms o f people reached and the scale o f financing, microfinance in India i s s t i l l small. I t reaches less than 10 percent o f the country’s rural poor.
Dominant among the microfinance models i s the SHG bank linkage model, whereby women’s SHGs are linked to the rural branches o f commercial banks, R R B s or cooperative banks. T h e other model i s specialized MFIs. The total branches o f MFIs are estimated to be in the range o f a few thousand compared to the vast numbers o f bank branches. Recent developments have led to other inter-linkages between the formal, both public and private sector banks, and semi- formal sector initiatives, particularly the SHG-bank linkage program (led by NABARD), as well as lending b y SIDBI (which has been a pioneer and takes credit for developing this financial institutional space) and commercial banks to MFIs.
Informal providers: Informal financiers include a range o f actors: landlords, local shopkeepers, traders, professional moneylenders, etc. While there are no definite estimates o f the number o f informal sector providers, these are spread very widely across the country. Not surprisingly, informal borrowing i s very important for the poorest (marginal and commercial categories), who are the most deprived o f formal finance. With a few notable exceptions (such as West Bengal, where land reforms are the most advanced in the country), village moneylenders and other types o f informal financiers have been around for as long as villages have existed. Informal financiers have the advantage o f knowing their client better than most formal institutions such as banks, they have a better ability to enforce contracts, and provide flexible products.
India’s Rural Credit Cooperatives
Credit cooperatives in India were established over a century ago, within the contours o f traditional principles o f self-help, democracy and solidarity, drawing primarily upon the Raiffeisen model that was adapted to the Indian context. The key purpose was to meet the credit needs o f rural India and provide a substitute to the dependence on moneylenders. The underlying approach was that cooperatives must remain autonomous associations o f persons united voluntarily to meet their common economic needs and aspirations, through jo int ly owned and democratically controlled enterprises. Over time, and particularly after the 1960s, the state assumed an ever increasing role in the promotion, development, management, financing, rehabilitation and regulation o f the CCBs. The central government and state and
*’ These estimates are for March 3 1, 2003 (without including a contingency provision o f Rs. 4,000 crores). The breakdown o f accumulated losses was as follows: Rs. 4,595 crores for the PACS, Rs. 4,401 crores for the DCCBs, and Rs. 281 crores for the SCBs, based on data from 2003.
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local governments justif ied their interventions in the CCS for the sake o f expediting the institutionalization o f rural credit and enlarging i t s coverage and abil ity to provide timely and adequate credit to farmers as tool for poverty reduction. However, i t was this which ultimately led to the impairment o f the governance and management o f the CCBs, and, over time, to their current position o f financial disrepair.
The CCBs have long operated through a three tier structure: the PACS constitute the base at the village level; DCCBs the intermediate tier, and SCBs, the apex. RBI reports that there were 108,779 PACS, 367 DCCBs and 31 SCBs in the country at the end o f March 31, 2005 (Figure 1.2). This provides the CCBs with an unmatched network o f outlets; one for every six villages in India, far deeper than the commercial bank outreach in rural areas with nearly four times as many outlets.
Figure 1.2
hlultl-Stare Operating In Slngie State
SCAWBs: State Co oplratlve Aprlculture and Rural Development Banks. PCARDBs Prlmary Co-opeiatlve Agriculture and Rural Derelopment Banks. Note : Ffgures in brackf& Indlcare the number of Institutions at end-March 2006 for UCBs and at end-March 2005 for rural co-
operative credlt Institutions.
Source: RBI, Report on Trend and Progress o f Banking in India, 2005-06
According to the latest RBI report o n the Trend and Progress o f Banking in India, as on March 31, 2005, these CCBs held around Rs280,OOO crores (US$67 billion) in assets, Rs145,OOO crores (US$35 billion) in deposits and Rs160,OOO crores (US$39 billion) in outstanding loans. As a proportion o f the total banking system, this share i s relatively small - 10.3 percent o f total banking assets, 7.1 percent o f total banking deposits and 1 1.9 percent o f total banking outstanding loans. However, the role o f the CCBs in formal agricultural financing i s s t i l l substantial. Data f rom the Economic Survey 2005-06, shows that . these accounted for around 22 percent o f total institutional credit to agriculture (Table 1.3). Furthermore, they accounted for the bulk o f formal credit to small and marginal farmers.
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Table 1.3 India: Institutional credit ta Adculture I I
Agency 2000-01 2001-02 2002-03 2003-04 2004-05 2005-OE Rs .
Cooperative banks 20,800 23,604 23,716 26,959 31,231 39,402 RRB 4,220 4,854 6,070 7,581 12,597 15,222 Commercial banks 27,807 33,587 39,774 52,441 a i ,481 125,477 Total 52,827 62,045 69,560 86,981 125,309 180,ioi Share of cooperatives in total 39% 38% 34 31% 25% 22% Source: NABARD data reported in the Economic Survey, 2005-06 and for 2005-06 based on information from Ministry of
Whi le the share o f the CCBs in agriculture credit has been a declining over time for a variety o f reasons, the CCBs s t i l l remain important on several counts: (i) the vast network o f PACS provides an unparalleled network to provide financial services to rural areas; (ii) the average loan size channeled through the CCBs (Rs. 6,637 or US$160) i s much lower than that o f the commercial banking system (Rs. 31,585 or USD765), thereby indicating the CCBs’ role in outreach to smaller farmers; (iii) the CCBs have a very large membership base - the Vaidyanathan Committee estimates this to be over 127 mill ion; (iv) o f the total membership o f the CCBs, there i s a significant degree o f participation f rom deprived sections o f society - the scheduled castes and tribes as wel l as small and marginal farmers; (v) over time the CCBs have also been used as a channel for delivery o f a variety o f other services, including the Public Distribution System, and while, this has typically led to losses on account o f inadequate spreads, the potential to channel a larger variety o f non-financial services - agriculture trading and agri-input supply for one - through this network on a profitable basis, remains true today, provided adequate capacity development and freedom to select and price services appropriately i s enabled. However, the potential o f the CCBs to provide quality services in rural areas, and particularly to poorer groups, i s severely constrained by their weak financial position (Annex 9).
The Go1 Package
Against this backdrop, Go1 announced, in 2006, a comprehensive and well-balanced package to revitalize the CCBs. The Go1 Package i s based on the recommendations o f the Vaidyanathan Task Force, which was established in August 2004 to suggest an implementable action plan for reviving the CCS. The Task Force submitted i t s report to the Central Government on 04 February 2005. The Government, after due consideration, accepted the recommendations in principle and placed them before the National Development Council at i t s meeting o n 27 June 2005. The Task Force report and i t s recommendations were discussed in depth at a special meeting o f the State Chief Ministers on 9 September, 2005. It was agreed that a draft statement o f the consensus emerging f rom the deliberations be prepared and discussed with the Finance and Cooperation Ministers o f selected State Governments. This meeting was held on 29 September, 2005, where the consensus was further crystallized into a Statement o f Consensus. Based o n this Statement o f Consensus, the Go1 Package spelling out the financial, legal and institutional measures for restructuring o f the CCBs was prepared.
The Go1 Package i s designed to: (i) minimize State Governments’ ownership in CCBs; (ii) ensure full voting membership rights for al l users o f financial services, including depositors in PACS; (iii) minimize State Government interference in al l financial and internal administrative matters in CCBs, including by removing the State Government’s participation on the Boards o f CCBs and limiting the powers o f State Governments to supersede the Boards o f CCBs; (iv) permit CCBs in al l three tiers freedom to take loans f rom regulated financial institution and not necessarily f rom only the upper tier and, similarly, placing their deposits with any regulated financial institution o f their choice, beyond certain agreed thresholds; (v) ensure timely elections before the expiry o f the term o f existing Boards; (vi) facilitate the regulatory powers o f the RBI over SCBs and DCCBs, and o f NABARD, over PACS; and (vii) ensure that al l CCBs are required to adhere to prudential norms as per the directions o f the
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supervisorhegulator. These reforms wil l be accompanied by measures to strengthen the managerial and technical capacity o f CCBs, and to enhance efficiency and cost savings, as wel l as financial restructuring support (FRS) to bring the potentially viable CCBs to an acceptable level o f health.
The main elements o f the Go1 Package are: (a) the introduction o f far reaching legal and regulatory reforms to address the governance and operational constraints currently experienced by al l three tiers o f the system, so as to ensure the democratic, self-reliant and efficient functioning o f CCBs; (b) measures to improve the managerial and technical capabilities o f CCBs through extensive training, and support more effective ‘networking’ and cost pooling, for example, through establishing a common IT platform for back office functions, that will help CCBs achieve scale economies and reduce their service costs, and improve the quality and transparency o f reporting; and (c) the provision o f one-time financial restructuring support (FRS) to qualifying CCBs, to cover their accumulated losses and bring them to an acceptable level o f health (see also Annex 4, 6).
Legal and Institutional Reforms
The root cause o f the poor financial state o f cooperative societies lies in poor management and governance. Unless these are improved, the entire capitalization amount would be wasted. This calls for amendments in the relevant Acts such as the Cooperatives Societies Acts (CSAs) o f the States, Banking Regulation (BR) Act, NABARD Act, D ICGC A c t etc., as detailed in the GoI’s Package, and a commitment o n the part o f states that the laws, as amended, will be implemented strictly.
Reforms in the CSA
As carrying out legal amendments i s a time consuming process, the State Governments may issue
i. Ensuring full voting membership rights o n a l l users o f financial services including depositors in cooperatives other than cooperative banks;
ii. Removing State intervention in al l financial and internal administrative matters in cooperatives
iii. Providing a cap o f 25 percent on State Government equity in cooperatives and limiting participation in the Boards o f cooperative banks to one nominee. Any State Government or a cooperative wishing to reduce the State Government’s equity further would be free to do so and the cooperative will not be prevented f rom doing so;
iv. Al lowing transition o f cooperatives registered under the state CSA to migrate to the Parallel A c t (wherever enacted);
v. Withdrawing restrictive orders on financial matters; vi. Permitting cooperatives in al l the three tiers freedom to take loans from any regulated
financial institution and not necessarily f rom only the upper t ier and, similarly, placing their deposits with any regulated financial institution o f their choice, beyond certain thresholds. The threshold limits may be determined by the State GovernmentRCS concerned for each entity or class o f entities having regard to the funds required by the entity to achieve the basic objectives o f the CCS;
vii. Permitting cooperatives under the Parallel Ac t (wherever enacted) to be members o f upper tiers under the existing CSAs, and vice versa;
viii.Limiting powers o f State Governments to supersede the Boards; ix. Ensuring timely elections before the expiry o f the term o f the existing Boards; x. Facilitating regulatory powers for RBI in the case o f cooperative banks; xi. Prudential norms including CRAR, for a l l financial cooperatives including PACS, as per the
directions o f RBI.
Executive Orders under the existing powers to bring in the desired reforms which wil l relate to:
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Reforms in the Banking Regulation Act I949
Amendments to the BR Ac t would include the following:
i. All cooperative banks would be on par with the commercial banks as far as regulatory norms are concerned;
ii. RBI wil l prescribe fit and proper criteria for election to Boards o f cooperative banks. Such criteria would however not be at variance with the nature o f membership o f primary cooperatives which constitute the membership o f the DCCBs and SCBs;
iii. However, as financial institutions, these Boards would need minimum support at the Board level. Hence, the RBI wil l prescribe criteria for professionals to be o n the Boards o f cooperative banks. In case members with such professional qualifications or experience do not get elected in the normal electoral process, then the Board will be required to co-opt such professionals to the Board and they would have full voting rights;
iv. The CEOs o f the cooperative banks would be appointed by the respective banks themselves and not by the State Government. However, as these are banking institutions, RBI will prescribe the minimum qualifications o f the CEO to be appointed and the name proposed by the cooperative bank for the position o f CEO would have to be approved by RBI;
v. Cooperatives other than cooperative banks as approved by the RBI shall not accept non- voting member deposits. Such cooperatives would also not use words l ike “bank”, “banking”, “banker” or any other derivative o f the word “bank” in their registered name.
Approach
The proposed financial assistance i s a one-time measure only. States would have the option to participate or not to participate in the package. To date, 11 states have jo ined the Go1 Package: Andhra Pradesh (AP), Arunachal Pradesh, Bihar, Gujarat, Haryana, Madhya Pradesh (MP), Maharashtra, Orissa, Rajasthan, Uttar Pradesh (UP) and Uttarakhand. A few more states are l ikely to j o i n before the cut-off date o f January 2008. States choosing to participate will be entitled for financial assistance under the package if they agree, through the mechanism o f a formal MOU or Exchange o f Letters with the Central Government, to implement (in a phased manner and within a period o f 3 years), the legal and institutional reforms envisaged. States not ready to make the choice immediately wil l be given two years to take a decision o n this matter.
Financial Restructuring Support (FRS)/Recapitalization
Financial restructuring support (recapitalization) under the package would cover accumulated losses in the CCBs. This, however, does not mean writing o f f o f the loans which are yet to be repaid by the borrowers. The cooperatives will have to continue to make efforts to recover these loans and thereby improve their financial health. FRS will be conditional and released only on the implementation o f the recommendations for legal and institutional reforms.
FRS will start with f i rst bringing the PACS to an acceptable level o f financial health through cleansing o f their balance sheets and strengthening their capital base, and then move o n to the upper tiers. This step will enable PACS to clear their dues to the upper tiers and thereby reduce the accumulated losses o f DCCBs. The DCCBs will thereafter be provided assistance to clear the balance o f accumulated losses, if any, and to reach a minimum norm o f capital adequacy. The same process will apply to the SCBs.
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Financial restructuring will include criteria for determining the eligible purposes and institutions, quantum o f assistance required, pattern o f sharing the liability, conditionalities attached and the time frame.
Eligible Purposes. Financial assistance under the package wil l be available for wiping out accumulated losses, covering invoked but unpaid and un-invoked guarantees given by the State Governments and other dues to the CCS f rom them, and increasing the capital to a specified minimum level. In order to ensure that CCBs continue on sound financial, managerial and governance norms, technical assistance wil l also be provided to upgrade institutional and HR development.
Accumulated Losses. Accumulated losses in the CCS cover losses o n account o f the following: (1) non-repayment o f loans for agricultural and other businesses given by the cooperatives; (ii) non- repayment o f loans to individuals for other purposes l ike consumer goods, housing, gold loans etc.; (iii) losses o n account o f non-credit businesses l ike public distribution system (PDS), procurement o f food grains o n behalf o f government, sale o f fertilizers etc.; (iv) non-repayment o f loans issued under government guarantees where the State Government has not yet paid to the cooperatives although guarantees have been invoked un-invoked; (v) non-payment o f dues f rom governments on account o f waivers or subsidies announced by them; and (vi) losses due to fraud etc. The magnitude o f the accumulated losses will be determined by SAs o f a l l the societies in the CCS using uni form criteria and standards.
CRAR. The package will include assistance necessary to bring al l cooperatives, including PACS, to a minimum Capital to Risk weighted Assets Ratio (CRAR) o f 7 percent. Whi le this ratio will be raised within three years to 9 percent by PACS, DCCBs and SCBs shall raise their C R A R as prescribed by the RBI. This increase in CRAR shall be met by the CCBs from their o w n resources.
Refund of share capital to State Governments. The share o f the State Government in the equity o f each institution in the three tiers shall be brought down below 25 percent o f the total subscribed share capital within a period o f three years, subject to the condition that there will be only one government representative on the Board o f a D C C B or SCB to represent the equity o f the State Government. The CEO o f the D C C B or SCB shall not be regarded as the representative o f the State Government for the purpose o f this paragraph. However, there would be n o State Government nominee on the board o f a PACS even if i t has received equity contribution f rom the State Government.
Where the State Government’s equity i s more than 25 percent, the amount in excess o f 25 percent shall be converted into a grant by the State Government to the concerned CCB. In other words, there will be n o liabil i ty devolving o n the CCB entity insofar as retirement o f State Government equity i s concerned, and n o funds will f low towards reducing the State Government’s equity to a maximum o f 25 percent.
A State Government or an individual CCB entity which wishes to reduce the State Government equity further will be free to do so. In the interest o f cooperatives becoming fully democratic, autonomous and self-reliant institutions, i t i s desirable that State Government equity participation be progressively reduced further and eliminated within a reasonable period o f time. T h i s can also be achieved by the societies in the CCS by moving over their registration to the parallel Acts wherever States have enacted such a law.
Cost of Special Audit (SA). The recapitalization will cover accumulated losses as o f 3 1 March 2004. For this purpose, a SA o f accounts will be carried out for a l l the PACS, DCCBs and SCBs based on uni form accounting criteria. T h i s S A will ensure that in the event o f insufficient provisioning made by the
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CCS, they do not get under capitalized. The S A will be conducted under the supervision o f the Implementing agency, NABARD.
A standard format and contents o f the S A reports has been developed. The arrangements for conduct o f the special audit (including the agencies and personnel) will be worked out by NABARD in consultation with each State as soon as MOU for implementation o f the package i s signed by that State Government.
Eligible Institutions. In regard to PACS which satisfy the eligibil i ty criteria, the capitalization will be direct; in regard to others, the capitalization will take place in the next upper tier. The capitalization, based on the independent special audit, will be sequential in nature, and each higher tier will be capitalized only after the beneficial impact o f the lower tier has been factored in.
All PACS with a recovery level o f at least 30 percent o f the demand as o n 30 June 2004 will qualify for being covered under the revival package and to receive financial assistance. State Governments will be under obligation to determine the future set up o f PACS with recovery levels o f less than 30 percent. State Governments will take appropriate steps to ensure the f l ow o f agricultural credit to farmers in the operational areas o f such non-qualifying PACS.
The PACS with recovery levels o f 50 percent and above will be capitalized to achieve 7 percent CRAR, subject to their meeting the benchmarks set by the Package. The PACS with recovery levels between 30 percent to 50 percent will receive financial assistance in three annual, back-ended installments at the beginning o f each succeeding year, subject to their achieving an incremental increase in their recovery rate by at least 10 percentage points on 30 June 2006 against the benchmark recovery achieved on 30 June 2004, and an annual increase o f 10 percentage points thereafter.
The Go1 Package notes that the CCBs cannot be financially viable institutions on a sustainable basis unless recovery levels are improved beyond these levels. I t will be necessary for them to become stricter on recovery and achieve recovery rates o f at least 85 percent over the next 5 years.
Technical assistance
The Package will also cover the costs o f training and capacity building to improve the financial management sk i l l s o f staff and board members; for installation o f uniform accounting and monitoring systems; as wel l as for computerization. This grant assistance f rom the Central Government will be phased over a period o f two to three years based on necessity and wil l culminate with the completion o f implementation in each State.
Costs and Sharing Pattern
The total cost o f the Go1 Package (at the all-India level) has been estimated by Go1 at Rs. 13,596 crore (a l itt le over US$3 billion).
The liabil i ty for funding the financial package will be shared by the Central Government, State Governments, and the CCS based o n origin o f loss and existing commitments. The Central Government wil l bear 100 percent o f the losses arising out o f direct credit business o f PACS, 100 percent o f the losses arising out o f the agricultural credit business o f DCCBs and SCBs and a portion o f their losses out o f non agricultural credit business, 50 percent o f the losses due to PDS and input distribution undertaken in pursuance o f national policy, the requirement o f resources to raise C R A R to 7 percent, and the full cost o f technical assistance for human resource development, computerization and improving accounting systems.
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State Governments will bear 50 percent o f the losses o n account o f the Public Distribution System (PDS) and input distribution, a l l dues pertaining to invoked and un-invoked guarantees and other receivables, and a portion o f losses out o f non agricultural business o f DCCBs and SCBs.
Total Add Contingencies Grand Total
The CCS wil l bear the losses arising out o f activities l ike direct advances taken up on their own and losses due to fiauds etc. The actual magnitude o f the share will be determined o n the basis o f the findings o f the special audit. However, a broad picture, based o n available aggregate data as o n March 2003, i s presented below:
I needed I needed 9,596 4,000 13,596
** This amount can be estimated only after recapitalized balance sheets for the CCS are available.
In broad terms, this works out to a sharing pattern wherein the Central Government wi l l contribute about 68 percent o f total costs, State Governments will contribute about 28 percent, and the CCBs will contribute about percent. The Central Government wil l provide i t s share as grants. The States are expected to meet their share f rom their budget or by open market borrowing. The Centre will also consider assistance on more liberal terms for special category States and for specified scheduled areas and tribal areas to meet their l iabil i ty under the package.
Benchmark Activities
Release o f financial assistance under the financial package will be back ended and linked to achievement o f pre-defined benchmarks in respect o f legal, institutional and regulatory reforms and will, therefore, be phased over a period. Following i s a summary o f benchmark monitorable activities by various agencies and release o f financial assistance under the package:
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Benchmark Activities
State Govt. accepts the package, issues consent letter, signs the MOUs (or exchange letters) with GoI.
PACSIDCCBslSCB sign Letters o f Undertaking with their respective implementation committees, the C S A i s revised by the State Governments, SAs are completed, and State Govt. releases committed liabilities.
Elections are conducted wherever due, professionals are either elected or co-opted, professional CEO appointed, CSA amended or special chapter incorporated, a sound system o f internal checks and controls put in place by SCBsDCCBs and Development Act ion Plans (DAPs) are signed with NABARD.
Release of financial assistance Assistance i s released for conduct of special audits, computerization o f CCS and HRD initiatives. 75 percent o f financial assistance for funding accumulated losses wou ld be released.
Balance 25 percent o f financial assistance for funding accumulated losses would be released.
Implementation Mechanism
NABARD i s designated as the implementing agency for the Package. However, for guiding and monitoring the implementation o f the scheme at national, state and district levels, Implementing and Monitor ing Committees would be constituted. At the national level, this committee would comprise Secretary or Additional Secretary (Financial Sector) and Secretary (Cooperation), and representatives o f RBI, NABARD, State Government(s), and two eminent co-operators. At the State level, the committee would comprise the Secretary (Finance), Secretary (Cooperation) and RCS, representatives o f NABARD, SCBs and a C A . At the district level, a similar committee would be constituted including the District Collector or an officer o f appropriate level. A dedicated team o f officers f rom NAJ3ARD would support each o f these committees to help implement the scheme.
Deposit Guarantee Scheme
NABARD i s currently examining the need to develop such a scheme for the members o f the PACS.
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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
Sector Issue
Bank-financed Projects Providing technical assistance to Savings and Credit Institutions for authorization, training to sector staff, strengthening these entities in marginal areas to widen access to financial services to vulnerable and indigenous groups, putting in place a monitoring and evaluation system, and supporting sector studies (Mexico) Providing technical assistance to Savings and Credit Institutions through capacity building, developing a technology platform, and information dissemination to create financially viable, operationally effective, managerially sound entities that serve vulnerable and indigenous groups (Mexico) Improving access o f micro-enterprises throughout the Northeast Region to sustainable, formal financial services by supporting expansion o f the program known as "CrediAmigo" in Brazi l through expansion o f the microfinance loan portfolio, strengthening the institutional capacity, evaluating the impact o f CrediAmigo o n micro-enterprise dynamics and household welfare. (Brazil) Providing training, implementing an automation project, rolling-out o f the banking system at branch level, and financing hardware and networking, and change management initiatives (Pakistan) An example o f a Bank-government pooling o f funds SWAP in the health sector, where the project helps to strengthen the BFP's abil ity to achieve poverty and inequality reduction and promoting human capital development by supporting consolidating the cash transfer programs, improving coverage, strengthening o f the system for identifying the target population and the basic institutional functioning o f the program. (Brazil)
Project Name
Savings and Credit Sector Strengthening and Rural Microfinance Capacity Building Technical Assistance Project (BANSEFI Phase I)
Savings & Rural Finance (BANSEFI) Phase I1 Project (ongoing)
Northeast Microfinance Development Project (ongoing)
Banking Sector Technical Assistance Project (ongoing)
Brazi l Bolsa Familia Program (on-going)
R Development Objective
S
S
ting Implementation Performance
S
S
S
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Strengthening six commercial banks financially (capital restructuring) and institutionally, and also take concrete steps to reduce the Government’s direct involvement in the banking system through opening up the capital to outside shareholders (India) Improving S M E access to finance (including term finance) and business development services, thereby fostering S M E growth, competitiveness and employment creation through a multi- pronged approach that addresses key bottlenecks to SME financing and development (India)
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Financial Sector Development Project: India (P010563, closed)
Small & Medium Enterprise Financing and Development project (on-going)
Annex 3: Results Framework and Monitoring
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
PDO The project wil l assist in providing members o f the CCBs, including small and marginal farmers, with significantly enhanced access to formal finance (credit, savings, etc.), by ensuring that the potentially viable CCBs in the Participating States are transformed into efficient and commercially sustainable institutions.
Outputs from each component Component I: Capacity Building Technical Assistance: Managerial, operational, technical, and compliance capacity o f participating CCBs i s appropriately strengthened, and training capacity o f cooperative training institutes i s adequately built.
Component 11: Institutional strengthening of the ccs Computerization and enhanced systems are adequately implemented in participating CCBs in order to promote better networking, cost efficiencies, and immoved tranmarencv
Project Outcome Indicators Rapid upward trend in the volume o f credit uptake from CCBs (70 percent over the l i f e o f the project);26 Rapid upward trend in the number o f small and marginal farmers who receive credit f r o m CCBs (50 percent increase by the end o f the project, relative to baseline); Upward trend in Recovery rates in the participating CCBs in the PS; Profitabil ity improves in at least 2/3 o f the participating CCBs in the PS by the end o f the project period. Participating CCBs publish election schedules and ho ld elections o n regular basis over the project period.
Output Indicators
Evidence o f t imely and satisfactory progress toward the delivery o f Component I outputs, as planned, including the fol lowing specific measures2’:
Capacity bui lding for faculty o f state-level cooperative training institutes to design and deliver basic training modules for the CCBs i s implemented according to the plan; A member education strategy for selected PACS’ members i s developed and implemented according to plan; Training and capacity building for participating CCBs to strengthen their abil ity to comply with the new regulatory framework, as we l l as their managerial, operational and technical capabilities i s implemented according to the TA nlan.
1.
2.
3.
Evidence o f t imely and satisfactory progress toward the delivery o f Component I1 outputs, as planned, including the fol lowing specific measures: 1. Computerization and enhanced systems are set-up
as planned: (i) new IT Platform i s installed in the PS; (ii) participating PACS in a l l PS migrate to the new Common Accounting System within three years from the date o n which the M o U was signed; (iii) participating PACS implement the new M I S within three years f r o m the f i rs t f l o w o f funds to the PS.
Use o f Outcome Information YR 0 (P re - re fod re -p ro jec t ) Data f r o m Special audits and Vaidyanathan Task Force creates baseline
Y R l t o 5 Annual outcome information wil l be used to track progress towards the P D O and to make changes in the project if necessary during implementation.
Use of Output Monitoring
Component I:
Information o n outputs from this component wil l be used to track progress towards institutional strengthening o f CCBs’ and CCB training institutes and to make changes in the project if necessary during implementation.
Component 11:
Information o n outputs f r o m this component wil l be used to track progress towards computerization and systems enhancement, and to make changes in the project if necessary during implementation.
26 Credit extended by Cooperative banks expanded by 14 percent for bo th two successive years (2004-05 over 2003- 04 and 2003-04 over 2002-03) fall ing short o f the government target o f an expansion o f 45 percent in 2004-05. 27 Through reports from NIMC and independent impact assessment, technical and social assessment during missions, review o f available data and stakeholder interviews.
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and reporting Component 111: CCS Financial Restructuring Support: Sustained solvency in potentially viable CCBs is achieved
Component IV: Project Implementation, monitoring and communication: implementation, monitoring and evaluation, and communication activities professionally and efficiently managed
Proposed components for implementation: I. Capacity Bui ld ing
Technical Assistance; I. Information
Technology; I. Financial
Restructuring Support; ’. Project
Implementation, monitoring and communication.
Evidence o f t imely and satisfactory progress toward the delivery o f Component I11 outputs, as planned, including the fol lowing specific measures: 1. All CCBs deemed eligible for FRS as per the pre-
determined criteria receive recapitalization support upon achievement o f the pre-agreed benchmarks as planned.
2 . Improved capital adequacy as prescribed by RBI: at least 213 o f the participating CCBs in the PS achieve higher capital to r i sk weighted assets ratios (CRARs) (increasing each year, and reaching a minimum o f 9 percent for PACS and a minimum rate for DCCBs and SCBs as determined by the regulator) over the l i fe o f the project.
Evidence o f t imely and satisfactory progress toward the delivery o f project o n time and budget, including the fol lowing specific measures:
Implementation capacity o f NABARD, and o f the SLICs, DLICs, and RCS in PS i s strengthened, as necessary; The agreed M&E framework i s developed and implemented; A communications and dissemination strategy i s prepared and implemented.
Inputs: (Budget for each Component)
1.
2 .
3 .
US$ 20.0 mi l l i on
US$ 80.0 m i l l i on
US$495.0 m i l l i on
US$ 5.0 m i l l i on
Total Project Costs: US$ 600 mi l l i on
Implementing Agency: NABARD
Component 111:
Information o n outputs f r o m this component wil l be used to track progress in the solvency position o f CCBs; insufficient improvement may trigger h r the r measures and feed in to D L I C i S L I C decision-making.
Component IV:
Information o n outputs f r o m t h i s component wil l be used to make changes in the project if necessary during implementation.
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Annex 4: Detailed Project Description
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
This annex provides details o f the four components o f the project: (a) Capacity building TA; (b) Information technology; (c) CCS financial restructuring support; and (d) implementation. All the components support, and, go hand in hand with the fol lowing legal reforms that underpin the Go1 Package :
Legal Reforms. Poor management and governance have contributed to the current state o f insolvency o f the rural CCS. Legal reforms that will contribute to address these shortcomings are thus essential t o ensure sustainability o f the project. More specifically, these reforms include the following
All cooperative banks would be o n par with the commercial banks as far as regulatory norms are concerned;
Fit and proper criteria will be stipulated by the regulator for election to boards o f cooperative banks. Such criteria would, however, not be at variance with the nature o f membership o f primary cooperatives which constitute the membership o f the DCCBs and SCBs;
Appointments to the Boards o f CCBs will also fo l low criteria prescribed by the regulator. In case members with such professional qualifications or experience do not get elected in the normal electoral process, then the Board will be required to co-opt such professionals to the Board and they would have full voting rights;
The CEOs o f the cooperative banks would be appointed by the respective banks themselves and not by the State Government. However, as these are banking institutions, RBI wil l prescribe the minimum qualifications o f the CEO to be appointed and the name proposed by the cooperative bank for the position o f CEO would have to be approved by RBI; and
Cooperatives other than cooperative banks as approved by the RBI shall not accept non- voting member deposits. Such cooperatives would also not use words l ike “bank”, “banking”, “banker” or any other derivative o f the word “bank” in their registered name.
Providing full voting membership rights on al l users o f financial services including depositors in cooperatives other than cooperative banks;
Removing state intervention in al l financial and internal administrative matters in cooperatives;
Providing a cap o f 25 percent on State Government equity in cooperatives and limiting participation in the Boards o f cooperative banks to one nominee. Any State Government or a cooperative wishing to reduce the State Government’s equity further would be free to do so and the cooperative will not be prevented from doing so;
A l lowing transition o f cooperatives registered under the CSA to migrate to the new A c t (in cases where the issuance o f a new A c t has been chosen);
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Withdrawing restrictive orders on financial matters;
Permitting cooperatives in al l the three tiers freedom to take loans from any regulated financial institution and not necessarily f rom only the upper tier and, similarly, placing their deposits with any regulated financial institution o f their choice, beyond certain thresholds;
Permitting cooperatives under the new A c t (wherever enacted) to be members o f upper tiers under the existing CSA, and vice versa;
Limiting powers o f State Governments to supersede the Boards;
Ensuring timely elections before the expiry o f the term o f the existing Boards
Facilitating regulatory powers for the RBI in the case o f cooperative banks; and
Establishing prudential norms, including CAR, for al l financial cooperatives including PACS.
Component I - Capacity building technical assistance (TA) (Bank financing: US$20 mn)
This component (corresponding with the HR initiative under the Go1 package) will a im to build up the capabilities o f the CCBs in al l three tiers to strengthen their ability to comply with the new legal, regulatory and supervisory framework, and to provide them with the necessary capacity to meet the performance targets set in their DAPs and promote longer t e r m financial sustainability. The focus will be on building the capacity o f the Boards and staff o f CCBs in al l three tiers in the following areas: understanding the new legal and regulatory framework and governance codes; improved performance tracking and reporting; implementation o f a new and enhanced common accounting system, MIWnternal controls, and audit mechanisms; enhanced credit appraisal and risk management; business diversification and product development; and HR development. Additionally, PACS will be provided with capacity building assistance to support more effective networking. Finally, the component will also include capacity building assistance to support “member education”, focused on small and marginal farmers who are members o f PACS; the latter wi l l involve developing and implementing a strategy, focusing on such areas as financial literacy, and better awareness o f rights and responsibilities, among PACS’ members. T o begin with, this component would support institutions in five or six states, with the possibility o f subsequent scale-up through Additional Financing.
Specifically, this component includes a focus o n the following broad themes:
(a) Developing the capacity of the Boards, management and staff of all CCBs in management and governance, especially in the fol lowing areas: understanding the new legal and regulatory framework and governance codes; improved performance tracking and reporting; implementation o f a new and enhanced common accounting system, MIS/ internal controls, and audit mechanisms; enhanced credit appraisal and risk management; business diversification and product development; HR development; and management capacity including Financial Management ski l ls.
Specifically, training and advisory services for DCCB and SCB staff will be provided on compliance with the new law, regulations, implementation o f the new governance codes, regulation and supervision mechanisms, and performance tracking and reporting, internal controls, MIS, PACS appraisal, product diversification and overall improvements o f their financial performance.
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The TA at the PACS level seeks to provide them with the tools to operate more effectively as a sustainable cooperative and to give members training on their rights and duties within the context o f a democratically functioning cooperative. Training for the PACS Board will focus on the changes introduced by the cooperative reform, their new duties and rights, governance requirements o f self- managed PACS. Agency roles wil l also be o f importance in the scope o f training at the PACS level; and PACS members: Training o f members o n rights and duties o f PACS members and o f their Board. The role played by these change agents will be crucial in ensuring that PACS get reoriented. Training for the PACS staff will focus on MIS, loan appraisal, and overall improvements o f the financial performance o f the PACS.
Training o f PACS staff and management will also include support for networking, pooling o f services, product diversification and service centers for product delivery, business planning and other means o f improving viability. The training will include a strong focus o n how to achieve cost reduction through promoting networkmg and ‘cost pooling’ v ia a wide array o f services (IT, legal, accounting, regulatory compliance, TA, liquidity management, etc.) that are subject to economies o f scale. In addition, training on risk diversification, credit risk exposure and credit risk swaps will be provided. Thus the reforms wil l assist in achieving the longer term goal o f improving risk management, efficiency, cost structure, and long-term viabil ity and sustainability o f CCBs.
(b) Capacity building assistance to support “member education” in selected PACS: The component will also include developing and implementing a member education strategy, involving stakeholder participation (including from PACS’ members, small and marginal farmers). The focus o f the education strategy would to provide CCBs’ members with the knowledge they require to become aware o f their rights, responsibilities and entitlements as members o f PACS, as wel l as understanding and using new financial products the CCBs may offer.
The GoI, with support f rom the German technical assistance development agency (GTZ), has already initiated the design o f a financial management strengthening strategy for the rural CCS including developing a uni form accounting framework for the CCBs at a l l levels (including PACS), enhanced Internal Control system, and guidelines for sound audit mechanism for the CCS. Given that GTZ’s current approach only envisages the implementation o f these financial management tools on a pi lot basis in a few CCS units, the Bank’s support would incorporate the financial management tools developed by GTZ consultants into the TA and IT components (the latter to ensure compatibility o f the hardware and software to be procured with the financial management computer tools developed).
Assistance would be delivered through a combination o f tools, including the provision o f conventional training programs; training-of-trainers; hands-on, on-the-job training and short-term and medium-term advisory services provided by experts; and study visits/exposure programs. T h e conventional training programs would be delivered primarily by existing state-level cooperative training institutes identified by NABARD, which would receive capacity building assistance, including training o f their faculty to design and deliver basic training modules for the CCBs in accounting, auditing, governance, HR management, MIS, and members duties and rights, etc. At the level o f DCCBs and PACS, on-the-job training and advisory services will be provided primarily by a cadre o f “mobile trainers/consultants/auditors”. In addition, on-the-job training at the level o f SCBs as needed; the consulting resources would be mainly national, although some presence o f international expertise may be required, at least o n a short-term basis.
Component I1 - Information technology (IT) (Bank financing: US$80 mn)
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This component (corresponding to the computerization initiative under GoI’s Package) will support, the computerization o f CCBs within each o f the five PS, in order to enhance the efficiency and transparency o f the CCS through enabling the efficient implementation o f the new common accounting system and MIS, and fostering cost efficiencies through facilitating the pooling o f costs related to back office transactions. The component would finance: (a) acquisition o f applications software and i ts ongoing maintenance and enhancement; (b) acquisition o f hardware; (c) roll-out services, including data entry o f the init ial database; and (d) users training, provided through conventional training programs as wel l as on-the-job training and advisory services, which, would be provided by a cadre o f “mobile trainers/consultants”. T o begin with, this component would support the development o f IT Platforms for the CCS on a l imi ted basis (in selected districts, in about five states), with the possibility o f subsequent scale-up through Additional Financing.
The IT system to be acquired would have two key characteristics:
(a) Common application systems providing the administrative functions required to manage products, customers/members, branches, internal operations, planning and compliance with regulations with a special emphasis o n accounting and MIS . This i s consistent with the trend within the sector to standardize the approach to the use o f appropriate technologies, procedures and processes and i s consistent with plans already initiated by NABARD in conjunction with GTZ, the German government development agency, to design and make available standard application systems in these two areas;
(b) Office Equipment for stakeholders, branches and integration agencies. These are l ikely to include personal computers or terminals, printers and ancillary equipment related to security, etc. according to the needs o f each stakeholder.
The IT component will focus on providing the basic IT infrastructure to the CCBs. As the CCBs in most PS have typically very l imi ted or n o IT deployment at present, the focus o f the IT component i s to facilitate software based accounting and MIS. This would help contribute to streamlining operations, strengthening internal controls and portfolio management, improving data monitoring and reporting abilities and thereby providing for better supervisory compliance. Whi le the IT infrastructure will be basic and comprise essential IT infrastructure as described above, i t will be structured to enable the SCBs and DCCBs to add more sophisticated applications and systems according to their needs using their own resources over time to fund this.
Component I11 -CCS Financial Restructuring Support (FRS) (Bank Financing: US$495 mn)
This component (corresponding to the recapitalization initiative under the Go1 Package) wi l l support the financial restructuring o f potentially viable CCBs by providing recapitalization as a grant (not equity) to wipe out the accumulated losses36 o f CCBs, restore the value o f members’ capital in the CCBs, and bring these institutions to a minimum capital to risk weighted assets ratio (CRAR) o f 7 percent. Whi le PACS will be required to raise this ratio within three years to 9 percent, DCCBs and SCBs shall raise their C R A R as prescribed by the RBI. This increase in C R A R shall be met by the CCBs f rom their own resources.
36 This however does not mean writ ing o f f loans that are yet to be repaid by borrowers; the CCBs will have to continue to make efforts to recover these loans. Whereas, the init ial recapitalization o f CCBs will bring their CRAR to 7 percent as o f 2004, the subsequent annual CRAR targets w i l l be based on their balance sheets at the time. T h i s means that the CCBs that may have incurred any additional losses since 2004 will not be fully compensated for all current losses, and w i l l be required to redouble efforts to recover losses incurred since 2004, if they are to meet the stipulated CRAR targets, over time.
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The FRS will start by f i rst bringing the PACS to an acceptable level o f financial health through cleansing o f their balance sheets and strengthening their capital base, and then move on to the upper tiers. This step will enable PACS to clear their dues to the upper tiers and thereby reduce the accumulated losses o f DCCBs. The DCCBs wil l thereafter be provided assistance to clear the balance o f accumulated losses, if any, and to reach a minimum norm o f capital adequacy. The same process will apply to the SCBs.
T o ensure prudent use o f public resources, only the potentially viable CCBs will be recapitalized. All PACS with a recovery rate o f at least 30 percent as on June 30, 2004 will qualify for being covered under the revival package and to receive financial assistance, provided the reform benchmarks (see below) set by the Go1 Package are met. State Governments wil l be under obligation to determine the future set up/exit strategy for PACS with recovery rates o f less than 30 percent.
Provision o f funds under the FRS will be l inked to the implementation o f a set o f far-reaching and time-bound legal, regulatory and institutional reforms to address the governance and operational weaknesses affecting CCBs. Specifically, pr ior to any funds from Go1 f lowing under this component, the concerned State Governments will be required to achieve the following set o f in i t ia l benchmarks: (a) Special Audits (SAs) are completed (DCCB-wise); (b) the CSA has been revised; (c) the State Government contributes i t s share o f capitalization funding; and (d) PACS, DCCBs and SCBs s i g n Letters o f Undertaking with their respective D L I C and SLIC. The benchmarks for the release o f the remaining recapitalization funds to CCBs are as follows: (a) the CSA i s amended or special chapter incorporated; (b) elections to the Boards o f CCBs are conducted wherever due; (c) professionals are either elected or co- opted to these Boards as per the fit and proper criteria as may be stipulated by the regulator; (d) professional CEOs satisfying the qualifications as may be prescribed by the regulator are appointed; (e) a sound system o f internal checks and controls put in place by CCBs; and (0 CCBs s ign Development Act ion Plans (DAPs) signed with NABARD, committing to key performance targets, over a three-year period (Annex 6, 7).
The amount required for recapitalization i s being calculated on the basis o f the Special Audit (SA) results. The states will conduct SAs o f a l l qualifying CCBs to determine the magnitude o f accumulated losses, and hence, the amount o f FRS for revival to be provided under this ~omponent .~ ’ In line with the Go1 Package agreed with the states, the SAs wil l be based on audited balance sheets as o f March 3 1 2004). The SAs are based o n standard formats and methodologies developed by NABARD, and some further improvements in the S A process may be suggested, based o n the lessons learned f rom the f i rs t set o f SAs that are completed. The SAs are conducted by the audit staff o f the State Cooperative Department, trained especially for this j o b by NABARD. The DLICs, which comprise representatives f rom NABARD, the DCCB, the State Government and a CA will provide quality assurance over the SAs, by reviewing the SAs and recommending to the SLICs the amount o f the accumulated losses o f CCBs as calculated by the SAs. The DLIC’s CA i s mandated by the Committee to conduct a sample check (15 percent) o f the SAs. Based on the recommendation o f the DLICs, the SLICs have the role o f approving the accumulated losses o f the CCBs.
Special Case: PACS with recovery rates between 30percent and 50percent
For these PACS, the same procedures as above will be followed, but they will receive financial assistance in three annual, back-ended installments at the beginning o f each succeeding year, subject to
37 I t may be noted that these SAs, which are financial reviews (rather than full-blown audits), are designed specifically to re- compute the accumulated losses of CCBs, by applying the standard provisioning norms as prescribed by RBI. T h e SAs will update previous figures used at the time the GoI’s package was being formulated. At that time, the accumulated losses in the system were estimated at Rs. 9,277 crores (a little over US$2 billion), with the breakdown as follows: Rs. 4,595 crores for the PACS, Rs. 4,401 crores for the DCCBs, and Rs. 281 crores for the SCBs.
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their achieving an incremental increase in their recovery rate by at least 10 percentage points on 30 June 2006 against the benchmark recovery achieved o n 30 June 2004, and an annual increase o f 10 percentage points thereafter. In other words, to receive any recapitalization funds under the FRS, these PACS wil l need to achieve one additional criterion - namely, a recovery rate o f at least 10 percentage points higher than what was reported on 30 June 2004.
Component I V - Implementation (Bank Financing: US%5 mn)
This component will cover support for project implementation, including:
(a) Overall implementation capacity, to build the implementation capacity o f a l l key entities that are involved in project implementation.
(b) Support for the SAs, will which entail support for undertaking the SAs in the five PS (as described in Component 111).
(c) Monitoring and Disclosure, which will focus on ensuring that the agreed M&E framework i s implemented according to plan. This wil l involve providing capacity building to the agencies responsible for data collection and reporting. In particular, i t will assist these agencies in strengthening their data gathering and compilation systems, as wel l as the sk i l ls o f the staff that undertake this activity. I t wil l a im to ensure that the data collection i s undertaken at the required frequency and that the reporting i s done according to the set criteria and i s consistent over time.
Support will also be provided to GoI, NABARD and other entities to help with the disclosure o f information o n the project’s design principles and implementation, throughout the implementation period. Such information could include, for example, (i) the criteria governing the selection o f states and CCBs supported, the evidence supporting the decision, and the process through which the selection was made; (ii) the criteria governing the selection o f CCBs for closure/merger/or any other form o f amalgamation or exit, the basis on which a particular approach was chosen, the evidence supporting the strategic choice, and the process through which it was executed; and (iii) the frameworks underlying procurement decisions. The objective would be to enhance information flows with regard to the project as also mechanisms to promote transparency as benchmarked by the RTI legislation.
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Annex 5: Project Costs
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
Local Foreign Total
Project Cost By Component and/or Activity U S $ mil l ion U S $ mill ion U S $ mill ion
Capacity building technical assistance Of which IDNIBRD
Information technology Of which IDNIBRD
CCS financial restructuring support Of which IDNIBRD
Imp1 em en tat ion Of which IDNIBRD
25.0 0 25 .O 20.0 0 20.0
100.0 0 100.0 80.0 0 80.0
618.0 0 618.0 495 .O 0 495 .O
7.0 0 7.0 5.0 0 5 .O
Total Baseline Cost1 750.0 0 750.0 Physical Contingencies 0 0 0 Price Contingencies Total Project Costs’ 750.0 0 750.0 o f which IDNIBRD 600.0 0 600.0
Notes: 1. Includes: IDA US$300 million, IBRD U S 3 0 0 million, Go1 counterparty contribution U S 2 6 0 million. 2. Identifiable taxes and duties are US$13.0 million, and the total project cost, net o f taxes, i s US$737.0 mill ion. Therefore, the share o f project cost net o f taxes is 98.3 percent. Total project costs do not include front-end fees paid for by Government o f India.
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Annex 6: Implementation Arrangements
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
The Banking Divis ion at the Department o f Economic Affairs (DEA), MoF, Go1 have been designated to provide overall policy guidance and monitoring, while NABARD i s the main implementing agency. A dedicated Department for Cooperative Reforms and Revival (DCRR), currently staffed by nine officers, has been set up within NABARD to coordinate implementation. A three-tier structure has been established to support implementation and monitoring. This includes: (a) a National-level Implementation and Monitor ing Committee (NIMC), which i s mandated to provide overall pol icy guidance and strategic direction o f the reforms; (b) State-level Implementation Committees (SLICs); and (c) District-level Implementation Committees (DLICs). The composition and detailed terms o f reference (TORS) and operating guidelines for these committees at a l l three tiers have been drawn up, the latter with inputs from the Bank (Table 6.1). Support teamshecretariats, staffed with NABARD officials, have been established to help the SLICs and DL ICs in their day-to-day functions.
Committee
National Implementation and Moni tor ing Committee (NIMC)
State Level Implementing and Moni tor ing Committees (SLICs)
Distr ict Level Implementing and Moni tor ing Committees (DLICs)
Table 6.1: Project Imple Members
Chairman: Secretary (Financial Sector), DEA, M o F Secretary, Ministry o f Agriculture Deputy Governor, RBI ChairmaniMD NABARD Secretary in charge o f Cooperation - participating states, two co-operators.
Chairman: Secretary, Finance Secretary, Cooperation CGM, NABARD Regional Off ice Registrar Cooperative Societies MD, State Cooperative Bank ED, NABARD Head Off ice CA
Chairman: Distr ict Collector DDM, NABARD (or NABARD representative) CEO, DCCB JRC S/DRC S NABARD Regional office Representative CA
ientation Committees
Overall guidance over Project implementation Monitoring o f achievement o f Project objectives
Key Objectives
Guide and monitor overall Project implementation in the state, including in computerization and capacity building o f staff Facilitate formation o f DLICs and signing Letter o f Undertaking between S L I C and SCB, and among DLIC, DCCBs and PACS Plan and ensure conduct o f SAs Pursue with State Government legal reforms Recommend appointment o f CAS for DLIC f r o m panel prepared by NABARD Vet and finalize SAs results and financial assistance recommended for PACS, DCCBs and SCBs Report progress to NIMC Guide and monitor overall Project implementation in the district, including in computerization and capacity bui lding o f staff Ensure signing Letter o f Undertaking by DCCBs and PACS and monitor i t s compliance Facilitate preparation o f time-bound action p lan for revitalization and business development by each P A C and DCCB; review its implementation Arrange Special Audit process and ensure sample test by CA Examine, finalize, certify and recommend sanction o f financial assistance to PACS and DCCB to the SLIC Send a monthly report o n implementation progress to SL IC and NABARD
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The project will adopt a SWAP approach, with Bank funds provided to Go1 through “parallel” financing. The SWAP will enable the Bank to support GoI’s reforms in a comprehensive and coordinated manner across the PS, and leverage Bank resources to scale-up impact.
Bank financing to Go1 i s complemented by financing f rom a number o f donors, including: the ADB, KfW and DFID. ADB’s Board has approved (in December 2006) a pol icy based programmatic loan o f US$1 b i l l ion to Go1 for this purpose; the loan supports a l l aspects o f the Go1 Package. A loan o f US$175 mi l l ion (equiv.) f rom KfW to support the recapitalization component o f the Go1 Package i s being prepared. The ADB and KfW funds will f low to five states (not including the PS to be supported by Bank funds). DFID has also committed to providing a grant o f US$2 m i l l i on to Go1 to support the technical assistance components o f the Go1 Package. In addition, GTZ i s supporting Go1 with project preparatory activities, including the development o f common accounting, auditing and M I S frameworks for the CCS.
Harmonized arrangements for M&E, reporting, financial management, fiduciary oversight, etc., to be used for the Go1 Package across states, have been agreed. N o t only will this help ensure more effective implementation and improved outcomes, i t will also help reduce duplicative reporting and transactions costs for the Borrower, and a greater focus on results.
An Implementation Manual (IM) acceptable to the Bank has been prepared and adopted by MoF, NABARD and other implementing agencies as applicable. The IM includes, inter alia, the agreed financial management and disbursement arrangements, procurement guidelines, and a detailed framework for the continuous measurement and monitoring o f outcomes (see below), that will be a key element in ensuring effective implementation.
Arrangements have been put in place to ensure intensive project supervision, covering FM and procurement aspects, with quarterly supervision missions. The supervision team will draw on expertise f rom the Bank, as wel l as external experts. The concerned development partners will meet regularly to facilitate effective coordination and communication to take stock o f implementation and results
Implementation Arrangements -capacity Building o f CCS; Information technology; and Project Implementation (Components I, I1 and IV)
NABARD has overall responsibility for a l l financial management activities, including periodic financial reporting to the Bank as specified in Annex 7. NABARD has set-up a dedicated department staffed by dedicated NABARD and supported by regional office staff to implement the reforms. T o ensure that these functions are performed efficiently and effectively, NABARD will provide requisite staffing to ensure that these functions are performed adequately. FM capacity, focused on accounting, MIS, internal controls, etc. will be built up at al l levels o f the CCS, supported through the project (Component I).
NABARD will be responsible for the overall coordination o f procurement under these components. Procurement under the IT component will fo l low standardized guidelines issued by NABARD detailing the technical specifications, tendering process and bid documentation, and benchmark costs for good and services. The SLICs wil l take responsibility for a l l technical and operational decisions, including short-listing o f vendors, finalizing the tender documents for competitive bidding, bid evaluation, award o f contracts, etc., with inputs from the SCBs. The SCBs will s ign the final procurement contracts. NABARD will act as the payment agent and will make direct payments to contractors/ vendors on the basis o f written instructions received from SLIC and SCB. NABARD will ensure that sufficient expertise in IT related procurement (for Component 11) i s made available to al l the SLICs. An Act ion Plan to mitigate procurement risks, which are related primarily to IT procurement, has also been developed. For procurement under the capacity building TA and implementation components,
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which will involve training and consultancies, NABARD’s HQ (DCRR) will take responsibility for technical and operational decisions. In the case o f high value training, which can be provided by private sector institutions, procurement will be done fol lowing Consultant guidelines. However, most o f the modules envisaged under the project’s capacity building TA program for CCBs wil l require NABARD to engage Specialized Cooperative Training Institutes, as there i s n o comparable expertise available in the private sector. Whi le these Institutes are not strictly government-owned, and are defined as “autonomous”, they often depend upon the State Governments/cooperative sector for their finances, in part or full. NABARD/SL IC wil l s ign MoUs with these Institutes for imparting training (see Annex 8).
Bank loan disbursements for Components I, I1 and TV will be made against expenditures on incurred by NABARD for the purchase o f goods and services to be financed by these components o f the project. Bank-financed project funds allocated to these components will be disbursed o n the basis o f interim un-audited financial reports (IUFRs) evidencing actual expenditures, on these components.
Implementation Arrangements for CCS Financial Restructuring Support (FRS) (Component 110
SAs and Estimation of Accumulated Losses. The process o f financial restructuring wil l begin by carrying out SAs to identify the amount and source o f losses accumulated in the balance sheets o f the CCBs and the amount o f resources necessary to cover such losses and bring the risk-weighted Capital Adequacy Ratio (CRAR) to 7 percent Upon M o U signature, NABARD would proceed to train a cadre o f auditors (Master Trainers) for each state who would, with additional support f rom NABARD, train the full set o f auditors who would carry out the SAs. These auditors would be drawn primarily f rom each state Audit Department. NABARD will check a l l SAs. Furthermore, the C A in the DL ICs will check a random sample (about 15 percent) o f the SAs in the District. Upon completion o f this process, the DLIC wil l certify the SAs and forward them to the SLIC for their f inal vetting.
The SAs will identify the type o f losses o f each CCB, as the source o f funding to cover such losses will vary. The Go1 - and thus funding f rom the Wor ld Bank loadcredit proceeds - cover 100 percent o f the losses arising out o f direct credit business o f PACS; 100 percent o f the losses arising out o f the agricultural credit business o f DCCBs and SCBs, and a portion o f their losses out o f non agricultural credit business; 50 percent o f the losses incurred by the PACS in carrying out noncredi t activities, such as the distribution o f basic foodstuffs (Public Distribution System, PDS) and agricultural input distribution o n behalf o f the GoI. The Go1 wil l also cover any additional funding required for CCBs to reach 7 percent CRAR. State Governments will bear 50 percent o f the losses on account o f PDS and input distribution, a l l dues pertaining to invoked and un-invoked guarantees and other receivables, and a portion o f losses out o f non agricultural business o f DCCBs and SCBs. The CCBs wil l bear the losses arising out o f activities l ike direct advances taken up o n their own and losses due to frauds or errors. Table 6.2 summarizes the source o f funding that will cover each type o f loss.
Table 6.2: Loss Type and Source of Funding under the Package Loss Type PACS credit
I Responsibility under theproject
PACS Non-credit DCCBs and SCBs P A C and agricultural credit DCCBs and SCBs lending to non-PAC cooperatives with invoked State guarantees DCCBs and SCBs lending to non-PAC cooperatives with un-invoked State guarantees DCCBs and SCBs lending to non-PAC cooperatives without State guarantees DCCBs and SCBs receivables f rom the State (State announced loan waivers)
Go1 Shared Go1 and State Go1 State
Shared Go1 and State
DCCBs themselves
State
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On the basis o f SAs, each SLIC and NABARD will certify the net payment to be made to each CCB. This process can be carried out as the SAs for each District are finalized and the net payment to PACS and DCCBs can be calculated by taking into account their dues to their respective upper tier bank. At that point, the payment to the concerned PACS and D C C B wil l be made, with the funds credited to their accounts. Payments due to the SCBs can be calculated on the basis o f dues f rom each DCCB as wel l as f rom the SA o f the SCB itself and the SCB would then receive i t s payment.
Fundsflow. All project funds wil l f l ow from Go1 (as grants) through NABARD. In l ine with the Go1 Package, once the M o U has been signed, the PS receives funds to carry out the SAs. Funding for the SAs can f low to a state as soon as it signs the M o U (thereby becoming a PS); a l l other funds for implementing activities under Component IV would begin to f low upon project effectiveness. Funds for implementing activities under Components I&II would f l ow only after the C S A has been revised by the PS. Finally, recapitalization funds to implement Component I11 would f l ow to CCBs, based on the achievement o f reform benchmarks, as specified in the Go1 Package and the MoUs.
With respect to Components I, I1 and N, the expenditure would be directly incurred by NABARD for the purchase o f goods and services to be financed by these components o f the project. For the FRS (Component 111), al l project funds will f l ow from Go1 through NABARD to the CCBs. Once the SAs for a l l the eligible PACS under a given D C C B have been completed, the net payment to the PACS will be calculated after setting-off their overdue liabilities to the DCCB. At that point, the payment to the concerned PACS and D C C B wil l be credited into their accounts. After the SAs o f a l l DCCBs in a state have been completed, payments due to the DCCBdSCBs can be calculated on the basis o f dues from each DCCB, and the SCB would then receive i t s payment. It may be noted that al l payments in respect o f a l l components/activities under the project will be made by NABARD’s Head office and/or Regional offices, so that the expenditures will be captured in NABARD’s accounting system (Annex 7).
Bank-financed project funds allocated to Components I, I1 and N will be disbursed o n the basis o f interim un-audited financial reports (IUFRs) evidencing actual expenditures, o n the various components and activities o f the project. Funds allocated to Component I11 (FRS) will be disbursed on the basis o f actual transfers made to CCS in accordance with OP/BP 6.0, and reported in the IUFRs under two sub-categories, the requirements for which are specified in the Go1 Package and the MoUs:
0 The f i rst category o f FRS funds (75 percent o f recapitalization support) will be for CCBs where an init ial set o f pre-defined benchmarks have been completed, which are (as mentioned earlier): SAs are completed DCCB-wise; the CSA has been revised; State contributes i t s share o f capitalization funding; PACS, DCCBs and SCBs s ign Letters o f Undertaking with their respective D L I C and SLIC;
0 The second category o f FRS funds (25 percent o f recapitalization support) will be for CCBs where a further set o f pre-defined benchmarks have been completed, which are: CSA amended or special chapter incorporated; elections to the Boards o f CCBs conducted wherever due; professionals are either elected or co-opted to these Boards as per the fit and proper criteria as may be stipulated by the regulator; professional CEOs satisfying the qualifications as may be prescribed by the regulator are appointed; a sound system o f internal checks and controls put in place by CCBs; and DAPs are signed with NABARD committing them to key performance targets to be achieved over a three year period.
An init ial advance o f U S $ 100 mi l l ion will be provided to Go1 to meet the expected expenditures in the f irst four months o f the project (with a provision to increase this limit if necessary to US$ 150 million). Whi le IUFRs will be submitted on a quarterly basis, Go1 would have the flexibil i ty to seek
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reimbursement earlier than the quarterly intervals by submitting reports for shorter periods. The disbursement percentage for al l project components will be set at 80 percent o f the gross expenditures (i-e., 80 percent o f GoI’s share) as reported by NABARD/ Go1 through the IUFRs. This i s based on the expected relative contributions o f the Bank and Go1 in the states where Bank funds would be deployed. Retroactive financing up to an amount o f US$ 50 mi l l ion will be made available for a l l categories o f eligible expenditures incurred after August 1, 2006.
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Annex 7: Financial Management and Disbursement Arrangements
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
NABARD has been designated as the principal Implementing Agency for this project. The Financial Management arrangements will be overseen by NABARD’s offices at i t s corporate headquarters in Mumbai (Department o f Cooperative Reform & Revival), at the state headquarters, and their district-level offices. Other entities at national level (NIMC), at state-level (SLICs, SCBs), district- level (DLICs, DCCBs) and village-level (PACS) would provide the necessary assistance to NABARD for collating the information, but will not handle project funds. NABARD’s existing FM system, with adequate enhancements and linkages with MIS, wi l l have the capacity to provide the Bank with accurate and timely information on the status of the project and use of Bank funds
A financial management (FM) assessment o f NABARD was carried out during appraisal and i t s capacity to report o n and coordinate a l l FM aspects o f the project was assessed. In addition, an independent consulting firm was engaged to carry out the “Financial Management and Accountability Assessment Study” for the short term rural credit cooperative sector. This study was carried out as per specific Terms o f Reference, across a sample o f entities in the CCS (SCBs, DCCBs and PACS) across two states, AP and Rajasthan. The key objectives o f the study included an assessment o f the:
Broader policy, FM, and accountability issues in the CCS at al l levels, and accountability arrangements within the GoI’s proposed reforms to help design the capacity building component o f the Package; Approach and method being used by “SAs” 38 to verify the quantification o f accumulated losses in the CCS, and the reliability o f this calculation based on the quality o f existing information available at the PACS level.
FM Strengths, Weaknesses and Mitigating Arrangements
The project has the following strengths in the area o f financial management: (i) NABARD’s budgeting, accounting and reporting system has been operational for several years, and will be used for accounting and generating the required financial reports under the project; (ii) payment & accounting arrangements for Component I, I1 and IV o f the project will be made within NABARD’s offices, which wil l ease accounting and financial reporting under the project (iii) the project i s expected to build adequate FM capacity o f CCS institutions over the project implementation period.
The consultant’s review o f FM, corporate governance, and accountability arrangements o f the CCS has indicated that PACS at the lowest tier o f CCS have weak FM capacities; there is, therefore, a clear need to improve & strengthen FM, accountability and corporate governance arrangements o f the CCS (especially PACS). Nevertheless, under the project, the FM function will be largely performed and coordinated by NABARD, and PACS wil l not handle project funds, as such this aspect o f FM capacity o f the PACS may not directly impact the project in the short run. The PACS capacity i s proposed to be strengthened over the project period by preparing and implementing an FM capacity building program as part o f the Technical Assistance program.
38 I t may be noted that these Special audits are not fully-fledged audits, but rather, financial reviews which are designed to re- compute the accumulated losses of the CCS, using their existing audited financial statements o f March 3 1, 2004, and applyng provisioning norms, as prescribed in the GO1 program.
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The FM risk for this project i s currently rated as substantiafg (Table 7.1). T o address this risk, the capacity building component will need to focus on strengthening the accounting, reporting and overall accountability systems and structures in the CCBs. Although the Country level FM risk for India i s rated at Modest4', i t does not have specific relevance for this project as major implementation will be done by NABARD which functions outside the core government. The linkage with core government will be only to the extent o f budgetary transfers f rom banking division to NABARD.
Risks Remarks(mitigati0n strategies)* Residual risk rating
level Implementa tion level (Entity/ Project)
Country I The Country level FM risk for India i s rated at Modest.
Accounting
Internal Controls
Funds flow
Financial Reporting
Auditing
M
S
OVERALL INHERENT RISK S
11 be available on a timely basis and for transfer to CCBs i f the States do
OVERALL C
H - High S - Substantial M - Modest L - L o w * The mitigation strategy i s provided in parenthesis.
39 Periodic supervision missions wil l review these ratings and revise as needed. 40 Whi le a Country Financial Accountability Assessment has not been conducted in India, several pieces o f core ESW and AAAs are available, which provide adequate information about budgetary & financial accountability framework and reasonableness in functioning o f the primary institutions o f accountability at the central government level. In light o f this information, the risk o f project funds not being used for intended purposes at country level (India) i s rated as moderate.
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NABARD’s Accounting Procedures, Policies and Accounting System
NABARD’s accounts are prepared on the basis o f a historical cost convention, in accordance with generally accepted accounting principles. They fol low accounting standards as issued by the Institute o f Chartered Accounts o f India. Additionally in accordance with RBI guidelines for prudential norms and income recognition, adequate provisions are made for loan assets o n the basis o f their ageing, as on the balance sheet date.
Project Financial Statements for the project will be prepared each fiscal year in accordance with consistently applied accounting standards and policies that are acceptable to the Wor ld Bank. These will identify the various sources o f funds and the actual usage on components and activities out o f these funds. A section covering Financial Management and Disbursement arrangements has been included in the Project Implementation Manual, which will provide guidance to project staff during implementation.
NABARD has a modem & integrated ”accounting system which has the capacity to capture al l financial transactions f rom i t s accounting units (Head Off ice & Regional Offices). For the Project, NABARD has devised a set o f separate account heads and account codes which will capture the expenditures incurred under the four components o f the project. This expenditure will be captured at the Head Office and Regional office levels and integrated for the purpose o f reporting to the Bank through GOI. I t has been confirmed f rom NABARD that the system would be able to extract information and report on the various project components/activities on an aggregate basis state wise.
Expenditures under the project
Financial Restructuring Support (Component 111): This component will support the financial restructuring o f eligible CCBs by providing recapitalization, aimed at wiping out accumulated losses. The amount required for recapitalization will be calculated on the basis o f the results o f the SAs.
The FRS funds, however, wil l be made available to CCBs that meet eligibil i ty criteria (threshold recovery rates, as detailed in Annex 4), and a further set o f additional sequencing criteria (set by SLICs as per N IMC/GoI guidance). The Go1 (MoF) will transfer funds to NAB- as ‘Grants-in-Aid’ through i ts budget and NABARD will transfer these funds to the concerned CCBs o n the basis o f the figures as verified by the DLIC and approved by the SLIC. The amounts due to the CCBs will be determined after netting al l dues.
TA/ I T Component (Component I & 11): I t has been confirmed in discussions with NABARD and GoI, that a l l expenditures under the Component I 2% I1 are to be incurred by NABARD’s offices and would, therefore, be captured within NABARD’s accounting system. For training related expenditures, NABARD has an existing practice o f entering into Memorandum o f Understanding (MoUs) with national, regional, and state-level cooperative training institutions for reimbursing the training and associated costs on the basis o f pre-agreed benchmarks. M o U includes service & expenditure benchmarks in respect o f the quality o f the training, level o f trainers, number o f trainees, duration, and payments that would be made to these institutions. No advances will be provided under these M o U s and al l payments will be on the basis o f invoices raised by the respective institutions, after the training i s completed, at agreed rates set out in the M o U . This practice wi l l be continued, with adequate enhancements in internal controls and documentation. National level consultants will also be hired, when necessary, for providing on-the-job training and advisory services at SCBs, DCCBs and PACS.
In respect o f IT procurement (hardware and software) NABARD would make payments o n the basis o f operational/technical decisions o f the SLICs, but the procurement contracts would be signed by the concerned SCBs and payments as per contractual milestones will be made directly by NABARD after
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SLIC/SCB certifies the invoices and advises NABARD to make payments. NABARD’s accounting system will capture this expenditure f rom individual regional offices, and consolidate them state wise and at a national level for the TA component. NABARD would seek reimbursements only on the basis o f actual expenditures booked o n the basis o f invoices, bills, receipts and other documents evidencing expenditures.
Project Implementation support: The project will also support costs incurred by NABARD and other implementing agencies (detailed in Annex 6), in relation to implementing the project and may include operational expenditures such as support for the S A in the PS, project monitoring, communication and hiring o f consultants to provide these services.
Key findings of a sample survey in 2 states from financial management and accountability study by Independent Consultant (Full report available in project file)
Accounting including financial reporting: All the PACS surveyed followed a Cash basis o f accounting. However accounting o f interest o n loans and advances was o n accrual basis. Several deficiencies were noted in day to day accounting o f transactions and internal control mechanisms were weak. Budgetary controls were inadequate or missing. Staffing was weak - key PACS officials l ike the paid Secretary/Manager/CEO were on the rol ls o f two or more PACS and were available only o n select days in a month. At the PACS level, there was a strong need for maintaining the loan accounts properly and periodically tallying the same with the books of the DCCB. Normal reconciliations were not being carried out at the PACS level.
Audit and Internal Control: All PACS surveyed did not have mandated standards for their audit. Audit reports o f PACS did not comment on the adequacy o f internal control mechanisms. Comments on proprietary elements namely, securities received against loans and advances, personal expenditures debited, security o f assets, etc. were not covered by the audit report. The audit was conducted by the officials o f the State Cooperative Department trained for the purpose. Specialized audit tools and audit approaches seemed to be absent.
Special Audit and Recar>italization: The basis for “special audit” was primarily the regular audit report for 2003-2004. As the focus o f special audit was compilation o f accumulated losses, the weaknesses/deficiencies under the existing accounting and audit system (mentioned above) for surveyed PACS continued even after the special audit. Therefore, the recapitalization figures may be impacted. The sample studies in the states o f AP and Rajasthan revealed wide variations between the accumulated profits /losses position as per regular audit as on 3 1.03.2004 and the init ial position as finalized by the Special Auditors. However the overall picture for a state will emerge only after the special audit for the entire state i s completed.
The above findings reflect the weaknesses o f the lowest tier o f CCBs and are in l ine with current understanding on their capacity. However these weaknesses are expected to be addressed by implementing the new common accounting system and MIShnternal controls under Components I & I1 o f the project,
Internal Control and Internal Audit
NABARD’s Inspection Department comprises an Inspection wing (responsible for inspection and assessment o f NABARD’s internal management systems, controls, and business practices) and a Concurrent audit wing (responsible for pre-checks in respect o f a l l financial transactions before payments
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are made, and NABARD’s loaning business). A part o f the concurrent audit function i s outsourced to private chartered accountancy f i r m s under specific terms o f reference and the Inspection wing conducts a sample check o f their work. The Inspection Department has confirmed that a l l financial transactions under the project would be covered under NABARD’s internal audit program; this provides some additional assurance for the appropriate usage o f Bank funds. The Department o f Supervision i s responsible for the supervision o f the SCBs and DCCBs (as wel l as Land Development Banks and RRBs) , for checking compliance with the relevant provisions o f the Banking Regulation Act, through on-site inspections and off-site monitoring. As a part o f their regular supervision work, DoS would also supervise the implementation o f this project and the recapitalization process.
Financial Reporting (IUFRs)
NABARD will be responsible for a l l project financial reporting and regular FM supervision o f the project. The D C C R will coordinate with Finance and Accounts Department (FAD) to ensure the timely production o f quarterly interim un-audited financial reports (IUFRs). These reports will make use o f existing financial reporting information in the NABARD’s accounting system and additional information, as necessary, and will consolidate financial information for al l components o f the project. Information in respect o f receipt o f funds by PACS wil l not be available through NABARD’s accounting system. However, this information will be generated through the M I S system and will be reconciled with the financial accounts to be sent along with quarterly financial reports (Interim Un-audited Financial Reports, IUFRs).
IUFRs would cover (a) Sources and Uses o f Funds for the project and separately identifying the components and activities o f Bank financed project, cumulative and for the period; (b) Details o f funds received at various levels for each o f the WB funded states (Component 111, FRS) (c) Payments made against contracts subject to pr ior review by the Bank, (d) Disbursement category wise break-up for expenditures made under the WB financed component (e) Overall Sources and Uses o f funds for assistance for each o f the states, cumulative and for the period. In addition a l i s t o f CCBs that have received the recapitalization (under the FRS) at the end o f the quarterly period, along with any amounts that are held as advances at any o f the three tiers will be maintained by NABARD and be made available during supervision missions. The reporting formats called as Interim Un-audited Financial Reports (IUFRs 1- 5) have been agreed with NABARD and are also attached in the implementation manual.
These financial reports will present evidence o n the actual usage o f funds in respect o f the Component I, I1 and IV and transfers in respect o f the FRS component (Component 111). The financial reports will also include details in respect o f amounts transferred to the various levels and those remaining unutilized at the end o f the reporting period, as specified in the Wor ld Bank loan legal covenants. It has been agreed that NABARD will transfer funds to the three ties o f CCBs within reasonable time o f the approval o f the Go1 Package by SLICs.
FM Staffing
The project’s Financial Management arrangements and supervision will be managed by NABARD including professionals drawn f rom the relevant NABARD departments (including D C R R and the Accounts Department). NABARD will act as the Bank‘s counterpart for a l l FM issues l ike financial reporting, disbursement and external audits and it will be responsible to ensure implementation o f agreed FM arrangements, including the generation o f t imely and accurate financial information and the preparation o f quarterly Financial Monitor ing Reports and their consolidation to be provided to the Bank through GoI.
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Funds flow and Disbursement
Budget: The M o F had provided a budget allocation o f Rs 1500 crore in the year 2006-07 for the Go1 Package which has been released to NABARD for funding the SAs and the recapitalization o f the CCBs in select states. I t i s understood that while a small part o f this amount has been expended in funding the cost o f SAs, the balance amount i s presently lying with NABARD. The budget allocation for the year 07-08 has been proposed at Rs 1500 crore. It i s understood f rom the Banking Divis ion that they may ask for a revised allocation as may be required later. It has been agreed that Go1 would maintain adequate budgetary availability o f funds for this Package during the implementation o f the project.
Funds flow: The Bank’s funds are expected to f l ow to such “participating states” (PS) that have signed M o U s with Go1 and NABARD possibly including: Gujarat, Haryana, Orissa, Uttarakhand and Uttar Pradesh. There will be a provision for adding or deleting states as the implementation o f the project proceeds (Figure 7.1).
All project funds will f l ow f rom Go1 (as grants) through NABARD. Upon effectiveness, funds for a l l activities under Components IV can flow; with the exception o f funding for S A which will f low to a state once i t becomes a Participating State (Le. has signed the MoU). Funds under Components I&II can be accessed after the CSA has been revised by the PS. Finally, recapitalization funds under Component I11 will f l ow to CCBs in a PS after: (i) the SAs are completed on a DCCB-wise basis; (ii) the state has contributed i t s proportionate share o f funding; and (iii) Letters o f Undertaking have been signed with relevant CCBs.
With respect to Components I, I1 and IV, the expenditure would be directly incurred by NABARD for the purchase o f goods and services to be financed by these components o f the project. For the FRS (Component 111), a l l project funds will f low from Go1 through NABARD to the CCBs. Once the SAs for a l l the eligible PACS under a given D C C B have been completed, the net payment to the PACS wil l be calculated after setting-off their overdue liabilities to the DCCB. At that point, the payment to the concerned PACS and DCCB will be credited into their accounts. Af ter the SAs o f a l l DCCBs in a state have been completed, payments due to the DCCBdSCBs can be calculated on the basis o f dues f rom each DCCB, and the SCB would then receive i t s payment. I t may be noted that a l l payments in respect o f all components/activities under the project will be made by NABARD’s Head office and/or Regional offices, so that the expenditures will be captured in NABARD’s accounting system.
With respect to the FRS (Component 111), the figures o f the calculation o f losses and netting between tiers are certified by the District and State Level Implementation Committees o n completion o f SAs. On receipt o f this certification the respective states will conf i rm that their part o f the contribution has been made available in full and that the payments have been sent to the CCBs.
NABARD will credit a l l PACS, DCCBs and SCBs accounts through cash transferdcheques from the local NABARD regional office to the respective SCB. This transfer maybe made in the form o f a payment order f rom NABARD’s RBI account to the respective SCB account in RBI, with instructions for the accounts o f DCCBs and PACS to be credited the net amounts calculated above. DCCBs usually ho ld saving bank accounts with SCB and similarly PACS hold their savings bank accounts with offices o f DCCBs. These bank accounts will be used for crediting the FRS package and also for recovering the dues owed to upper tier. I t will be ensured that funds given to a CCB would not be available for full usage till the over-dues to upper tier have been squared ofp’. Once al l eligible PACS in a district have been recapitalized to the required level, the D C C B will receive FRS. The SCB will be the last to receive FRS (Annex 4, 6).
A guidance in this respect wil l b e issued by NABARD to the participating CCBs. 41
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Disbursements: Bank-financed project funds allocated to Components I, I1 and IV will be disbursed on the basis o f interim un-audited financial reports (KJFRs) evidencing actual expenditures, on the various components and activities o f the project. Funds allocated to Component I11 (FRS) wil l be disbursed o n the basis o f actual transfers made to CCS in accordance with OP/BP 6.0, and reported in the IUFRs under two sub-categories, - the requirements for which are specified in the Go1 Package and the MoUs:
Category 1 : Eligible goods, works, I USD 25 mn
0 The f irst category o f FRS funds will be for CCBs where an init ial set o f pre-defined reforms have been completed, which are (as mentioned earlier): SAs are completed DCCB-wise; CSA i s revised; State contributes i t s share o f capitalization funding; PACS, DCCBs and SCBs s i g n Letters o f Undertaking with their respective DLIC and SLIC; The second category o f FRS funds will be for CCBs where a further set o f pre-defined
reforms have been completed, which are: elections to the Board conducted wherever due; professionals are either elected or co-opted to the Board as p& the fit and proper criteria as may be stipulated by the regulator; professional CEOs satisfying the qualifications as may be prescribed by the regulator are appointed; a sound system o f internal checks and controls put in place by CCBs; CSA amended or special chapter incorporated.
0
80% o f the gross expenditures
Component 111, ‘actual expenditure’ i s defined as the actual amounts actually transferred to CCBs’ accounts for recapitalization, and these figures will be consolidated for a districthet o f districtshtate and certified by NABARD before including it in the IUFRs. As regards other components, the “actual expenditure” will be the expenditure actually incurred by NABARD as evidenced by the amounts booked in the monthly accounts o f NABARD o n the basis o f bills, invoices, receipts and other documents including payment vouchers, and certified by NABARD as the expenditure actually incurred. Any payments to CCBs, which are not in line with the Go1 Package, will not to be eligible expenditure under the project.
component I and IV Category 2 : Eligible goods, works,
An ini t ia l advance o f US$ 100 mi l l ion will be provided to Go1 to meet the expected expenditures in the f i rst four months o f the project (with a provision to increase this limit if necessary to US$ 150 million). Whi le IUFRs will be submitted o n a quarterly basis, Go1 would have the flexibil i ty to seek reimbursement earlier than the quarterly intervals by submitting reports for shorter periods. The disbursement percentage for al l project components will be set at 80 percent o f the gross expenditures (i-e., 80 percent o f GoI’s share) as reported by NABARD/ Go1 through the ILJFRs and disbursements will be made to two Designated Accounts: one for IDA and the other for IBRD. This i s based o n the expected relative contributions o f the Bank and Go1 in the states where Bank funds would be deployed. Retroactive financing up to an amount o f US$ 50 mi l l ion will be made available for a l l categories o f eligible expenditures incurred after August 1,2006.
USD 80 mn 80% o f the gross expenditures
Table 7.2: Eligible Expenditure Categories under the FRS Component
services and implementation costs for Component I1
Category 3 :Recapitalization Funding under Component I11 (FRS)
Category 3a: First Disbursement Category 3b: Second Disbursement Total
USD 370.75 mn USD 124.25 mn USD 600 mn
80% o f the gross expenditures 80% o f the gross expenditures
services and implementation costs for I I
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Designated Accounts: T w o Designated Accounts, one for IDA and the other for IBRD would be opened with the RBI by the Banking division, GoI, and an init ial advance credited into it. This init ial advance has been set at US$ 100 mi l l ion and may be increased to U S $ 150 mi l l i on to meet the expected expenditures for the ini t ia l four months under the project. Replenishments would be provided to the Designated Accounts through the disbursement mechanism (IUFRs) as the expenditures are incurred by GOY NABARD on various components o f the project.
Statutory (External) Audits
Entity Audi: NABARD’s statutory auditor i s appointed by GoI, usually for a continuous period o f two years, and selected from the panel o f C A f i r m s that i s maintained by RBI for financial sector audits. Currently the audit i s conducted by M/s Sharp & Tannan, CAS. An entity audit o f NABARD will be submitted to the Bank within 6 months o f the end o f the fiscal year.
Project audit: During the f i rst two years o f the project i t i s proposed to have a six- monthly statutory audit o f the project. For this the financial statements will have to be prepared six-monthly in a format which i s similar to the agreed KJFRs. After the f irst two years, the audit will be annual. The audit will cover the project in the Bank financed states (both for the recapitalization and the other components) and a certification o f the aggregate project with “Overall sources and uses o f funds”. This project audit will be conducted as per agreed Terms o f Reference (TORS) by a firm o f C A S acceptable to the Wor ld Bank.
The auditors will certify in the project audit report the actual amounts transferred by NABARD to the SCBs and thereon to the DCCBs and PACS for recapitalization purposes, and verify that these amounts were as reflected in the IUFRs. A management letter, commenting on internal control and areas o f improvement, will also be produced. The auditors’ report will be submitted to the Bank n o later than three months after the closing o f every ha l f year for the f i rst two years o f the project and thereafter within 6 months o f the end o f every fiscal year. In addition, the Bank shall also receive the annual audit report o f NABARD within six months f rom the end o f each fiscal year. Table 7.3 l i s t s the audit reports that will be monitored by the Audit Reports Compliance System:
Agency
DEA
NABARD
NABARD
Table 7.3: Reports Audit Report
Designated Accounts audit report
Project audit as per agreed TOR including audit o f Designated Accounts
Entity Audit
I be Monitored by the Audit Audited by
CAG
The Statutory auditors (An independent firm o f CAS acceptable to the Bank)
An independent firm o f CAS, as appointed by Go1
Leports Compliance System Due Date
30” sep o f every year
Within 3 months o f the end o f every 6months for the first two year o f the project. Thereafter the audit will be annual and will be submitted after the end o f 6 months o f the fiscal year
30th September o f every year
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Project Implementation Manual
A project Implementation Manual (IM) has been prepared and reflects the overall implementation arrangements & associated FM arrangements, including funds flows, disbursements and reporting, internal control and audit arrangements which have been have been finalized with the Go1 and NABARD during preparation.
FM Supervision
The project will require intensive supervision in the in i t ia l years to review the implementation o f the agreed FM arrangements and progress in the implementation o f the FM strengthening component financed under the Bank project. This approach will entail: (a) Supervision on a risk based approach with three missions a year and support by consultants for f ield
missions. Thematic supervisions could also be conducted to provide specific focus on certain components o f the project, l ike FRS.
(b) Visits to a sample selection o f states based o n the extent o f rollout o f the project to supervise the FM arrangements
(c) Implementation o f the FM strengthening and TA program: Supervision will also include review of the implementation o f the Common Accounting System, M I S and Internal Control System as envisaged within the project.
(d) In addition the supervision could include a fiduciary oversight o f the operations/decisions o f the SLIC/ D L I C in so far as it pertains to PS, and do a sample verification o f the approval o f "accumulated losses calculations" by the SLIC. In addition performance reviews o f some recapitalized PACS to assess i f they are now working as per prudent business practices and are l ikely to be sustainable in the future wil l be undertaken.
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I NABARD I
CCBs
I CCBS via SCB 1
Funds now from SC8 "4. DCCS Io PACS
I SCB 1 I
PACS, DCCBs, SCB Fund. flow from SCS VI. OCCS to PACS
NABARD 1 When MoV tranche 2 conditions met
I
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Annex 8: Procurement Arrangements
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
General
Procurement for the proposed project will be carried out in accordance with the Wor ld Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated M a y 2004 revised October 2006; and “Guidelines: Selection and Employment o f Consultants by Wor ld Bank Borrowers” dated M a y 2004 revised October 2006, and the provisions stipulated in the Legal Agreement. The general descriptions o f various items under different expenditure categories are described below. For each contract to be financed by the Loadcredi t , the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, pr ior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan.
NABARD has prepared a project Implementation Manual (M), which includes detailed procurement guidelines for guidance o f the procuring agencies at a l l levels under the Project. Details on responsibilities with respect to issuance o f the tender notices, receipt o f the bids, bid evaluation, issuance o f the acceptance letter, signing o f the contract, etc. are indicated in the Manual. The basic principles are indicated in Attachment 1.
NABARD’s tendering process for N C B i s in line with C V C guidelines and requirements, and i s similar to the Bank’s guidelines and requirements, the main difference being that NABARD follows a “two envelope system”. NABARD has confirmed that that the two envelope system will be implemented such that: (a) the technical and financial bids are opened in public; (b) the price bids are kept sealed at a safe place; (c) the date for opening o f the technical envelope i s indicated in the bid documents; and (d) bidders who qualify and have a responsive bid, are invited for the public bid opening o f their price bids, while those who do not qualify are given one week to request a review. These guidelines have been issued to the SLICs in al l Participating States to ensure consistency in approach and would be monitored by NABARD.
Procurement of Works: Works procured under this project would include construction o f small buildings for PACs o n selective basis, and some rehabilitation works for cooperative training institutes. The amount would be very limited, costing less than U S D 5,000 per contract, and would be procured fol lowing Shopping procedures.
’
Procurement of Goods: The major procurement under the project involves purchase o f computer hardware and software for the CCBs. The procurement wi l l be done using a bidding document developed by NABARD in consultation with Bank. However, for I C B contracts, the Standard Bidding Documents (SBDs) o f the Bank, as maybe revised f rom time to time, will be adopted.
NABARD has prepared (a) new common accounting standards, (b) accounting and M I S data standards for PACS, (c) guidelines for the PS to produce IT strategies, in i t ia l ly for the PACS, and (d) accounting and M I S data standards for aggregation at the district and consequently the state-level and the guidelines for related IT strategy approaches by the PS, which would determine the procurement requirements at the state-level.
Most procurement under the project will be at the state-level. The SLIC in each PS will be entrusted with carrying out the procurement in line with NABARD’s guidelines as described in the Implementation Manual. The contract will be signed by the SCB in each participating state and NABARD will make the payment and will monitor compliance with the procurement procedures.
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The procurement o f a large number o f computers for a large number o f geographically dispersed PACS renders the procurement complex and r isky. Adoption o f state-wise procurement as against centralized procurement makes the contracts manageable as also the numbers and logistics. As such, the procurement risk i s substantially reduced.
There will be three major procurement components in the contracting stage: (a) acquisition o f the applications software and i ts ongoing maintenance and enhancement. Procurement would mostly be done competitively, though there may be cases where single-sourcing can be justif ied if a State has already progressed sufficiently in implementing. (b) Hardware procurement, competitively throughout, in bulk, in one or a few stages closely coordinated with roll-out (c) Roll-out services, data entry o f the init ial database, users training which will be procured competitively in parallel with the hardware procurement. The Procurement Plan for the f i r s t 18 months has been prepared.
Selection of Consultants: This may include hiring o f Consultancy Services under Components I, I1 and IV, including consultancy services for procurement, support for management o f IT component, advisory consultancy teams to work with NABARD staff on the design and implementation o f monitoring framework, etc. Short l is ts o f consultants for services estimated to cost less than USD 500,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.
Training: In addition to a large IT component, the project supports substantial capacity building o f CCBs and others. This will be delivered through training, which will be carried out in accordance with periodic plans and budgets to be prepared by NABARD. The training requirements, training strategy, and training modules, have been finalized by NABARD.
The bulk o f the training will be provided by specialized training institutes, such as the Bankers’ Institute for Rural Development (NABARD promoted), College o f Agricultural Banlung (RBI promoted), and various state-level cooperative training institutes. Whi le these institutes are defined as autonomous, they often depend upon the State/Cooperative Sector for their finances in part or full. However, there i s n o comparable expertise available in the private sector.
NABARD/SCBs will s i g n MoUs with these institutes. The MoUs will indicate the number o f batches to be trained, number o f persons per batch, fees per person, which will be based on the data available f rom previous training o f similar nature. These M o U s will also include service benchmarks with respect to the quality and level o f training.
Operational Costs: administrative procedures o f NABARD, which were reviewed and found acceptable to the Bank, would be followed for financing these costs.
Others: The Project will support recapitalization o f eligible CCBs, however, there i s n o procurement in this component.
B. Assessment of the Agency’s Capacity to Implement Procurement
An assessment o f the capacity o f NABARD/other State agencies to implement procurement actions for the project has been carried out by Bank procurement staff which involved a review o f the organizational structure for implementing the project and interaction with concerned staff responsible for IT procurement, administration, and finance. The IT Unit in NABARD i s headed by an o f f ce r o f the rank o f Chief General Manager. Their main function i s to play the role o f technology provider with respect to Information System (IS) and IT needs o f NABARD so as to enable users to employ state-of-the-art
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technology on a continued basis to achieve their goals, as wel l as develop and maintain the corporate database. As such, the concerned staff o f NABARD i s well-versed in the preparation o f technical specifications for the IT component. However, except for some consultancies to be procured by NABARD, the bulk o f the procurement would be done at the state-level where, as mentioned earlier, SLICs would be in charge o f technical and operational decisions on procurement. The SLICs are composed o f members having administrative, financial, and audit background. Nevertheless, there i s a need to enhance IT-related project procurement capacity at State level.
NABARD will ensure that sufficient expertise in IT related procurement i s made available to al l the SLICs. A procurement assessment identified the need to enhance the procurement capacity o f SLICS, with a particular focus o n the procurement o f IT equipment under Bank-financed projects. This will cover support to SLICs to build up the required expertise in the preparation o f bidding documents, preparation o f tender notice, invitation for bids, receipt, opening, and evaluation o f bids, finalizing o f the contract, and the administration o f contract which, besides other things, include ensuring compliance with the contract conditions, payment terms, variations, dispute resolution, monitoring etc. T o achieve this, NABARD and the PS will use the services o f IT experts, including f rom organizations l ike NICSI, who have the necessary experience in IT procurement. These efforts will be supplemented by training o f SLIC members. An init ial workshop to familiarize the SLIC members in procurement processes will be arranged by the Bank some time during June 2007; this will be followed up by continuous capacity building support to be provided under the project’s Component IV. The support will be reviewed after six months o f implementation to assess the need for further capacity building efforts.
Procurement Risks and Mitigation Measures.
For the reasons mentioned above, the overall project risk for procurement i s high. Nonetheless, this risk i s substantially lowered by the decision to undertake state-level procurement and by actions initiated to build IT procurement capacity for SLICs. An Act ion Plan to mitigate any remaining r isks has been developed by NABARD. Apart f rom the efforts to strengthen the capacity o f SLICs mentioned above, the key elements o f the action plan are as follows:
0
0
0
0
0
SLICs will determine the number and locations o f PACs requiring IT equipment pr ior to proceeding with IT procurement; A strong monitoring mechanism i s being established; NABARD/SLICs will publish information o f a l l contracts above Rs 1 mi l l ion on website to bring about transparency in decision making; SCBs/SLICs wil l maintain a l l the records relating to procurement; SCBs/SLICs will also maintain a separate record relating to complaints and their redressal.
Prior Review
Goods and Equipment: All I C B contracts. Consultancy Services: All contracts above US$ 200,000 equivalent.
Post Review
All contracts not covered under prior review will be subject to post award review. This review shall be done as follows:
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0 A sample o f contracts will be selected on random basis annually for the post award review by the Bank or i t s representatives. Bank supervision missions will also conduct post award review of selected contracts.
0 NABARD will provide semi-annual information o n MOUs signed with the training institutes. NABARD will also provide, o n semi-annual basis, information relating to the training provided by such institutes, such as number o f batches, duration o f training, number o f participants, expenditure per participant, etc.
0 Statutory Audits: The statutory audit for the project will be conducted as required under relevant provisions for the specific institution, which will also review the procurement procedures adopted and give a report accordingly.
Procurement Plan
NABARD has developed a Procurement Plan for the f i rst 18 months o f project implementation which provides the basis for the procurement methods. This plan has been agreed between NABARD and the Bank o n M a y 24, 2007 and i s available in the Project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs.
Procurement Thresholds: All contracts o f goods above U S D 2,000,000 to be procured following ICB procedures. The contracts between U S D 2,000,000 and U S D 100,000 to be procured fol lowing N C B procedures. The contracts below U S D 100,000 may be procured fol lowing Shopping procedures. During The f irst 18 months, n o I C B contract i s anticipated. Proprietary items and software may be purchased following Direct Contracting procedures.
D. Frequency of Procurement Supervision
The Bank will carry ex-post and supervision missions on Procurement twice a year.
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Attachment 1
N C B Procedures
The Process o f Procurement will be Transparent, providing equal opportunity and should not place unnecessary restrictions on bidders. Wide publicity should be given to the Notice Inviting Tendedhv i ta t i on For bids. The Notice should be published in at least one leading daily Newspaper. Wherever possible, the Notice should also be published on purchaser’s website. Bidders should be given sufficient time to purchase documents and prepare the bids. Normally, this should not be less then 30 days. In addition to Tender box, bids submitted by post or courier should also be acceptable. The financial bids should be opened publicly in the presence o f bidders or their representatives who chose to remain present. The bids should be evaluated in terms o f provisions o f bidding documents. There should not be variation between conditions in bidding documents and the Contract Agreement. The evaluation should be fully documented. N o bids should be rejected unless there are clear and logical reasons and the same should be fully documented. All important documents (e.g. bill o f quantities, technical and commercial conditions, price bid, letter o f Intent, Agreement) should be signed by both parties and the records should be properly maintained. Pre dispatch inspection should be ensured whenever required. There should be n o negotiations, even with the lowest bidder except in exceptional circumstances. The exceptional circumstances should be defined before the procurement process takes place. NABARD follows a “two envelope system” which has the fol lowing safeguards: (a) technical and financial bids are opened in public; (b) price bids are kept sealed at a safe place; (c) the date for opening o f the technical envelope i s indicated in the bid documents; and (d) bidders who qualify and have a responsive bid, are invited for the public bid opening o f their price bids, while those who do not qualify are given one week to request a review.
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Annex 9: Economic and Financial Analysis
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
Economic Analysis
The viabil ity o f India’s CCS i s undermined by a combination o f factors that can be grouped into four major areas: (a) an inadequate legal and regulatory framework; (b) poor governance; (c) weak operational capacity; and, (d) problems related to size, scope and scale, which undermine cost efficiency (these problems are not unique to India’s financial cooperatives). Several key factors have been identified in the literature as critical to the long-term survival and development o f Cooperative Financial Institutions (CFIs) and the realization o f their full potential to serve low-income clients. 42 These factors include the quality o f the management and operations o f CFIs, the benefits o f networks to ensure efficiency and sustainability, and the role o f legal frameworks to encourage this potential; whether the legal and regulatory framework should be uni form for a l l CFI or whether i t should be tiered; and, the effects o f different supervisory arrangements on the governance and performance o f CFIs. The project addresses these factors and supports the implementation o f extensive reforms in al l four major areas, with the a im o f ensuring the long-term viabil ity o f the CCS.
Lessons from four case studies in Burkina Faso, Brazil, Kenya and S ~ i - L a n k a ~ ~ point to many cross-cutting issues pertinent to the long-term viabil ity o f financial cooperatives. They argue that on the one hand, business models o f institutions-that is, the nature o f the clientele served, level o f integration as a network, governance and staffing, types o f operational systems, types o f products and services, and so on-are influenced by external factors (such as the level o f financial sector development; the legal, regulatory, and supervisory environment; the role o f donors, technical assistance agencies, and political factors; and historical and cultural factors). On the other hand, CFIs themselves often have an influence o n some o f these factors. The four case studies showed that CFIs can successfully provide financial services in rural areas in developing countries, and that they can do so while being profitable. The major advantage o f CFIs over typical MFIs i s their abil ity to offer deposit services, which are increasingly recognized as the financial services most demanded by l o w income communities. Furthermore, because rural CFIs charge interest rates that are significantly lower than those charged by their MFI and informal competitors, an increase in the interest rates they are able to charge to levels closer to the market rate can improve their profitability. Generally, CFIs have operated better in a regulatory environment that has adequate prudential regulations and the supervisory mechanisms necessary to enforce them. Diversification, o n a geographic basis and by income levels o f clientele, seems to have helped al l the financial cooperative networks studied to scale up in a sustainable way. Because the marginal cost o f transactions i s not closely correlated with the size o f transactions, a mixed clientele effectively allows CFIs to serve their lower-income clientele by providing larger loans without having to charge the higher interest rates or fees typically charged by MFIs that exclusively serve low-income clients. The question o f h o w the level o f integration o f CFIs i s related to CFI performance could not be definitively settled f rom the case studies.
An analysis o f Mexico’s P A T M W B A N S E F I project points to similar conclusions44., Whi le some trade-off was detected between financial viabil ity and outreach in some institutions, many others managed to balance this trade-off by lowering transaction costs through higher volumes and larger loans. In the aggregate, the project has been able to achieve both i t s outreach and sustainability goals. This was a result
42 Carlos E. Cuevas and Klaus P. Fischer (2006) “Cooperative Financial Institutions: Issues in Governance, Regulation, and Supervision,” World Bank Working Paper 82, Washington, DC: World Bank.
Ajai Nair and Renate Kloeppinger-Todd (2007), “Reaching Rural Areas with Financial Services: Lessons from Financial Cooperatives in Brazil, Burkina Faso, Kenya, and Sri-Lanka,” ARD Discussion Paper 35, Washington DC: World Bank. 44 Julia Paxton (2006), “An analysis o f Mexico’s PATMIR Project,” Ohio University.
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o f the project’s emphasis on taking the time to invest in human capital in the institutions operating in a more marginal context; on the project being part o f an integrated rural development strategy; on technical assistance to strengthen governance; and, on improved financial transparency through improved M I S and better accounting which helped the cajas perform better and the project to track and report implementation better.
In India, institutional reforms, recapitalization, rationalization and legal, regulatory and governance reforms to be supported by the proposed project will address many o f the weaknesses o f the CCS and help it move towards sustainable financial intermediation through the creation o f financially stable and prudently managed CCS institutions. An improved CCS would result in cost savings, efficiency gains, and better intermediation at lower costs for these institutions. In particular, the reforms address all four o f these areas as follows:
Inadequate regulation and supervision of the CCS The existing legal and regulatory framework for the CCS i s inadequate and characterized by weak regulation, inadequate prudential norms, poor supervision and polit ical interference. W h i l e the RBI i s responsible for the regulation o f the upper two tiers o f the CCS (with NABARD as the delegated supervisor), even in these tiers there i s a problem o f overlapping jurisdictions and dual control exercised by State Governments. Prudential regulations to provide the framework for sound supervision o f the CCS have also been lacking.
The project will address this problem through far-reaching reforms. Participating States will be required to pass new legislation or amend their existing CSAs to ensure that the regulation and supervision o f the CCS i s significantly enhanced and put o n par with that o f commercial banks, while reducing the supervisory powers currently vested in State Governments. In particular, reforms will facilitate the extension o f the regulatory powers o f the RBI over SCBS and DCCBs, and o f NABARD, over PACS; ensure that a l l CCBs are required to adhere to prudential norms stipulated by the RBI (including CAR); and, ensure that fit and proper criteria are adhered to for election to boards o f CCB’s and for their management.
Poor governance: The CCS i s plagued by poor governance and State interference: elections for Boards o f Directors o f CCS institutions have not taken place for a long time, Boards are frequently superseded, and State Governments regularly interfere in day-to-day operational decisions. Most State Governments combine several roles: dominant shareholder, manager, regulator and supervisor, and auditor. Political influence o n the CCS has had a consistently negative impact o n the financial performance o f the system.
The project will address these problems by committing States to implementing the reforms necessary to create a democratic, self-reliant and efficiently functioning CCS by: (i) eliminating State Governments’ ownership in CCBs; (ii) ensuring full voting membership rights for al l users o f financial services, including depositors in PACS; (iii) removing State Government interference in al l financial and internal administrative matters in CCBs, including removing the State Government’s participation on the Boards o f CCBs and limiting the powers o f State Governments to supersede the Boards o f CCBs; (iv) ensuring timely elections before the expiry o f the term o f existing Boards; (v) removing state intervention in al l financial and internal administrative matters in cooperatives; (vi) withdrawing restrictive orders on financial matters; and, (vii) permitting cooperatives in al l the three tiers freedom to take loans from, or place deposits with, the regulated financial institution o f their choice.
In addition, capacity building will be provided under the project to support member education, focused on small and marginal farmers who are members of PACS. This will involve developing and implementing a member education strategy, focusing on such areas as financial literacy, and better awareness o f rights and responsibilities, among PACS’ members. Furthermore, training will be provided
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for the members, management and boards o f CCS institutions in governance issues, including agency responsibilities, rights and responsibilities o f individuals and institutions, the new governance requirements, the new legal and regulatory framework, and stakeholder participation.
The proposed reforms will introduce enhanced governance and a regulatory environment driven by prudential regulation, which would transform the legal, regulatory, and governance frameworks o f the CCS and result in strengthened supervision o f the system, and in setting-up the pre-conditions to make the cooperatives member-driven and member-focused. This i s a crucial f i r s t step to bring India’s CCS to a governance status akin to that o f Mexico’s CFIs at the outset o f their reform process.
Weak operational capacity: Management and staff o f CCS institutions are often polit ically appointed and poor ly qualified, internal controls are weak or non-existent, credit appraisal and financial management sk i l ls are limited, information technology and M I S i s typically antiquated and dysfunctional (and mostly absent in the case o f PACS), and the capacity to develop new products and services i s lacking. In addition, PACS lending products are not suited to the agricultural cycle, and PACS lack the financial resources to meet credit demand: the majority o f PACS lending i s short term (less than one year) and aligned with the CCS financial year ending on 31 March, but not with crop cycles. As a result, one driver o f the l o w average on time recovery rate (about 66 percent) on PACS lending i s that repayment i s required at a point in the crop cycle when farmers have a l imi ted abil ity to pay because their working capital i s t ied up in a growing crop. Furthermore, a recent Bank study o f the CCS45 found that a lack o f crop insurance was one o f the two main causes o f insolvency in CCS institutions. Only about 15 percent o f farmers are n o w covered by crop insurance. As a result, PACS are exposed to the r isks posed by agricultural calamities such as drought and, because o f their small size and lack o f geographical and sector diversification, the impact o f these r i sks can be catastrophic.
The project will address these weaknesses by strengthening the management capacity o f CCS institutions and providing the staff, management and Boards o f the CCS with capacity building for: performance tracking and reporting; implementation o f a new and enhanced common accounting system, M I S h t e r n a l controls, and audit mechanisms; enhanced credit appraisal and r i sk management; business diversification and product development; and HR development. The project will also support financial management strengthening by developing a uni form accounting framework for the CCS at al l levels (including PACS). It will also support the development o f an IT platform that would help computerize and connect a l l three tiers o f the CCS with a v iew to promoting the enhanced transparency o f the CCS, including implementation o f a new PACS-level accounting system and MIS .
The institutional strengthening aspects o f the project will thus al low PACS and DCCBs to better assess the creditworthiness o f their clients (who often lack stable incomes and collateral) at lower transaction costs, and PACS wil l also be able to diversify their service offerings to respond to the changing demands o f rural areas and the growing significance o f the rural non-farm sector, particularly the production o f higher value crops and increased value addition by small farmers. Taken together with the improved financial condition o f the system these factors should allow CCS institutions, including PACs, to borrow more funds in commercial financial markets and thus stem the outflow o f rural savings.
Finally, there are some fundamental economic factors of scale and scope that have constrained the viabil ity o f CFIs, and these include: (i) their inabil ity to capture economies o f scale sufficiently to provide affordable financial services to the poor (due to the existence o f a large number o f small CFIs
45 See the “Report on Crop Insurance” (2006), Washington, DC: World Bank. This critical problem was also identified as a major problem by a 2005 ADB-financed study o f the rural financial sector in Rajasthan, West Bengal, and Andhra Pradesh; see “Rural Finance Sector Restructuring and Development” (2005), Manila: ADB.
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resulting in high transaction costs); and (ii) their inabil ity to diversify r isks adequately (because their operations are restricted to small geographic areas).
Various country experiences show that in order to achieve efficiency gains, creating economies o f scale by pooling costs i s a useful tool; at the same time, in order to achieve higher profitabil ity and reduce the institution-specific impact o f NPLs o n solvency, pooling o f r isks should be considered as a risk mitigation tool. Whi le networks o f CFI’s can go a long way in helping to achieve this, the level o f integration desired, the extent to which the apex organization becomes a strategic hub, the right balance between subsidiarity and centralization, the trade-off between reduced volati l i ty o f failure risk associated with higher integration and the burden o f financing an apex that increases with integration, are a l l questions that leaders o f C F I movements around the wor ld have to grapple with, and policymakers need to understand better.
Drawing on cross-country experience, and especially on the Mexican experience, the project wi l l include a strong focus on cost reduction by promoting networking and cost pooling, and by providing CCBs, acting as the apex o f their respective State CCS, with a wide array o f services (IT, legal, accounting, regulatory compliance, TA, liquidity management, etc.) that are subject to economies o f scale. These initiatives will be supported through the project’s TA and IT components. Efforts will also be made to gradually promote risk diversification: the consolidation o f PACS and DCCBs that i s expected to occur over time should help reduce the geographical concentration o f the credit risk exposure o f PACS. In the medium to longer run, a market for credit r i s k swaps could be developed. Thus the reforms will assist in achieving the longer term goal o f improving risk management, efficiency, cost structure, and long-term viabil ity and sustainability o f CCS institutions
In addition, reforms such as: the freedom to set interest rates; the abil ity to offer deposit services as wel l as other payment services; the availability o f greater financial resources f rom commercial sources and flexibil i ty for the CCS to serve a mixed clientele; and, mechanisms to provide other products such as crop insurance, will help the CCS to diversify i t s r isks and achieve lower transaction costs as a result o f economies o f scale.
Impact of better access to finance on rural incomes and livelihoods
The total membership o f PACS i s 127 mi l l ion people, o f which 37 percent (some 47 mi l l ion people) are small and marginal farmers. Despite the extensive rural finance network in India there i s s t i l l a significant gap between the supply of, and demand for, reasonably priced rural credit. The distressed condition o f the system has meant that a relatively small proportion o f members receive credit f rom these institutions, or place their savings in them. Total formal rural credit comprises only about 26 percent o f aggregate bank credit and only about 20 percent o f marginalized groups have access to the formal financial sector. These l o w levels o f access are caused in part by the fact that about 60 percent o f DCCBs are in some degree o f financial distress and consequently unable to fully perform their intermediation functions in the rural economy. By improving the condition and performance o f the CCS institutions it i s ’ expected that a better functioning system wil l be able to mobilize increased financial resources and leverage i t s capital more efficiently to channel larger volumes o f credit to rural areas (Figures 9. 4 and 9.6), thus helping to bridge the supply-demand gap in rural finance.
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lihood o f catastrophic inco
dequate credit has been o f the activities needing
, some 59 percent o f rural
respectively.
A significant body o f research points to a close link between better access to finance and improved livelihoods. A key finding o f economic and sector work i s that wel l developed and inclusive financial systems are generally associated with rapid growth and better income d i s t r i b ~ t i o n ~ ~ , Access to finance helps the poor catch up with the rest o f the economy as it grows and also helps extend the range o f individuals, households, and f i r m s that can get a foothold in the modem economy whi le helping to reduce damaging concentrations o f economic power. There i s now a growing body o f theoretical and empirical literature showing that broader access to finance helps an economy produce more, and distribute income more fairly47. Bo th consumers and producers benefit, as their welfare and productivity are raised48’
46 For a summary, see, for example, Patrick Honohan et. al. (2005), “A Note on Financial Access Indicators”, Washington, DC: World Bank. 47 For a producer, access to credit for fixed or working capital enables an increase in production possibilities which can have far- reaching implications not only for the producer but for patterns of employment, occupational choice and even economy-wide productivity and growth. 48 For a good discussion on the microeconomic underpinnings o f the welfare implications of improved access to financial intermediation, see Improving Access to Finance in Brazil, World Bank (2003). T h e study points out that intermediation enables inter-temporal choices in consumption and investment for the individual, allows the determination o f the cost of capital and hence helps guide investment to its most productive use, and permits the social reallocation o f savings from low to high productivity uses thus raising social welfare.
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Improved access to finance could also have longer term welfare implications, permitting people to borrow when young (for example, for education or for other physical or human capital investments) and then repay and save for retirement when they are older4’ as a result o f the increased income which such investment creates. In addition, increased access to less expensive financing would also reduce the extortionate interest costs paid by small and marginal farmers to moneylenders, which i s often higher than their earning capacity, and can result in bankruptcy and extreme poverty. Improved access to formal credit should enable small and marginal farmers to substitute borrowing f rom moneylenders (at rates in the range o f 35 to 60 percent per annum) with formal borrowing f rom PACS (at rates o f about 12 to 13 percent). Moreover, by virtue o f also supporting non-farm activities, successful institutional reforms o f the CCS and the development o f new non-agricultural credit products could contribute to increased diversification o f household economic activities, improving income security.
T o summarize, reforms o f the CCS will, over time, help increase rural household incomes through: (i) increased access to financial resources and assets; (ii) lower costs o f borrowing; (iii) higher returns f rom farming; (iv) increased diversification o f household economic activities; and, (v) possibly increased household participation in economic activity resulting f rom increases in the number and intensity o f both farming and non-farming activities.
Impact on broader rural economy
By working in parallel with other rural development initiatives, such as the development o f crop insurance and agricultural marketing reforms, the project should contribute to better overall economic performance o f the rural sector resulting f rom the more efficient use o f financial services and increases in the number o f rural borrowers and volume o f credit f rom formal institutions. Through the increased availability o f finance from the CCS, better access to productive resources (farm inputs, improved agricultural technologies, and better rural infrastructure) and increased overall economic activity and wealth, the project could thus potentially contribute to the transformation o f the rural economy by empowering small and marginal farmers and increasing their participation in economic development, and provide an opportunity for l o w income households to realize significant social, equity, and poverty reduction gains.
In addition, as the major institutional provider o f agricultural production credit, a wel l functioning CCS wil l positively affect the backward (inputs) and forward (marketing) linkages o f the rural economy and their integration with other services used or provided by the rural cooperative system.
Lastly, phasing out State Governments’ interference in the system would restore the autonomy o f the CSS institutions as member controlled and owned financial intermediaries. The transformation o f PACS into genuinely member controlled entities would mean that they would be increasingly driven by the priorities o f their members rather than the States. Individual institutions would be more self reliant and autonomous, and more capable o f articulating local issues and mobil izing local resources, and thus enhance the bargaining power o f local communities, widen options for income generating activities, and enhance local control over factors o f production.
Impact on future fiscal burden
While the project involves a substantial stream o f expenditures over the next three to five years, creating a sustainable and viable CCS would reduce the future fiscal burden for GoI. First, the
49 T h e ‘ l i fe cycle’ hypothesis as an explanation for savings and borrowing behavior, discussed in Ando, Modigliani and Brumberg in a series o f articles in the 1950s and 1960s.
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Government’s insistence on transformation o f the legal, regulatory and governance frameworks o f the CCS as a precondition for the provision o f FRS assistance would ensure that i t will not have to bai l out the CCS again in the future, as it has done repeatedly in the past due to the failure o f previous programs to address the fundamental problems o f the system. Second, further postponing the reforms and recapitalization would only add to the final costs o f restructuring the CCS (because operating and credit losses would continue to accumulate) and would have an adverse impact o n access to rural finance in the interim. Third, as discussed above, the alternative o f liquidating the CCS would involve substantial financial and polit ical costs, as wel l as social and economic dislocation costs that are deemed to be untenable as compared to the costs o f implementing the Go1 Package.
In conclusion, by transforming the CCBs into more effective, efficient and commercially sustainable providers o f financial services, the project will help the poorest households in rural India - small and marginal farmers -to access formal financial services more readily, increase the amount o f financing available f rom the formal sector, reduce borrowing costs, and reduce dependence o n moneylenders, who charge exorbitant rates o f interest. I t i s expected that the reforms envisaged under the project would help expand the membership o f the CCS (including small and marginal farmers). Furthermore, the team’s analysis indicates that, by strengthening PACS and their upper tiers, the project would result in a 2.5 times increase in the credit volume outstanding f rom the CCS over a five year period, to about US$ 40 b i l l ion (equivalent). The investments in institutional capacity building and IT proposed under the project would help improve PACS’ efficiency. Beyond credit, the project i s expected to help the CCS provide a wider range o f financial services, such as savings, money transfers, insurance, etc. Better access to these services would help the rural poor to protect themselves against periods o f l o w income or unexpected fluctuations in income (for example, caused by drought or crop diseases), and help to maintain consumption levels (through the accumulation o f financial saving^).^' Access to cheaper and more plentiful credit (from PACS instead o f moneylenders) will provide small and marginal farmers not just with the immediate resources necessary for consumption spending, but also with financing for productive investments that can help improve agricultural productivity and also contribute to the diversification o f household economic activities, thereby increasing incomes and improving livelihoods.
Financial Analysis
Financial condition of the CCS
The CCS institutions, R R B s and the rural branches o f commercial banks, together account for 28 percent o f the deposits and 27 percent o f the loans o f the Indian banking system (see Table 9.1 for key balance sheet size indicators for the CCS). With i t s vast branch network, the CCS has about 60 mi l l ion borrower accounts, accounting for over two thirds o f the number o f rural borrowers and rural branches, and about a third o f the credit disbursed in rural areas. Whi le the share o f the CCS has been declining over time, i t s t i l l remains a very important
Figure 9.1: Condltion of Rural Credit Cooperatives in India
I 57%
50%
30%
1 StCBs DCCBs PACS
50 T h e role o f savings and borrowing in protecting consumption against unexpected shocks, first discussed by Milton Friedman (1957) in the ‘permanent income hypothesis’ has since been extensively tested empirically, as discussed in Bond and Townsend (1996).
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Table 9.1: A Profile of Rural Co-operative Credit Institutions*
(As at end-March 2005)
SCBs DCCBs PACS .
No. of Co-operative Banks 31 367 1,08,779
Balance Sheet Indicators (Rs crores) i ) Deposits 44,3 16 82,098 18,976
i i i) Loans and Advances Issued 44,452 66,266 39,212 iv) Loans and Advances Outstanding 37,346 73,091 48,785 v) Total LiabilitiedAssets 71,806 1,33,33, 75,407
ii) Borrowings 14,608 22,568 40,250
* Based on reporting institutions ** Working capital Source: RBI, Report on Trend and Progress o f Banking in India 2005-06
Exvected financial imuact
of mal finance, especially considering the average loan size channeled through the PACS (Rs. 6,637 or US$1505') i s much smaller than that o f the scheduled commercial banks (Rs. 31,585 or US$713), thereby indicating the CCS' important role in financial outreach to smaller farmers.
However, the financial position o f the CCS i s severely impaired and the accumulated losses o f the system have been estimated at approximately US$ 2 bil l ion. Performance indicators are weak, and worsen going down the tiers o f institutions (Figure 9.1). The weak
F l g u r e 0 . 2 : Impact of t h e F R S on t h e C R A R of 10 D C C B s
The widespreid financial distress o f PACS 1 and DCCBs has been driven by the interplay o f the
that would not merely help build the capacity and systems in a l l three tiers o f the CCS but also
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5' Vaidyanathan Committee Report, 2005 52 The problem o f crop insurance i s being addressed through separate Government initiatives to improve the National Agriculture Insurance Scheme, the main crop insurance program in the country. The National Agricultural Insurance Scheme provides insurance cover for food crops, oilseeds, and selected annual commercial crops. Indebted farmers (Le., borrowers o f seasonal agricultural loans) are covered on a compulsory basis, while non-indebted farmers may be covered on a voluntary basis. N A I S has so far only reached about 18 million, mainly small, farms out o f a total o f about 120 mi l l ion farms and has experienced recurring losses. T h e Bank i s providing technical support to gradually increase the coverage o f agricultural insurance and improve program design and performance.
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The impact o f the FRS on CCS institutions will be to restore their solvency, enable them to achieve sustained profitability, and significantly improve their ability t o attract additional public and
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Figure 9 . 3 : Impact of t h e FRS on t h e ROA of 10 D C C B s
private financial resources for intermediation through PACS to farmers. These positive financial effects can be demonstrated by modeling the impact o f the FRS o n DCCBs (which are the primary conduit for PACS refinance and thus provide a proxy for the performance o f their member PACS) at both the systemic and micro level. Ten DCCBd3 (half o f which had negative capital in 2005) f rom eight states have been analyzed using conservative assumptions and their performance has been projected in two scenarios: (a) that they receive financial assistance equal to the amount o f retained losses as o f 31 March 200454 from the FRS; and, (b) DCCBs do not receive FRS assistance but s t i l l benefit in the form o f improved credit quality (i.e. lower provisioning costs) f rom the legal and governance reforms required by the Go1 Package.
This analysis shows that, over a five year period fo l lowing receipt o f financial assistance in 2007, the DCCBs’ C R A R should rise f rom an average o f minus 0.88 percent to 9.08 percent (Figure 9.2). In the same timeframe, return on assets (ROA) should show consistent improvement, rising f rom 0.07 percent to a 1.46 percent by the end o f the period (Figure 9.3), providing a good indication that the DCCBs will be able to achieve sustained profitability. Lastly, the dramatically improved C R A R and profitability o f the DCCBs should enable a substantial increase in their lending because they would achieve the creditworthiness required to increase their borrowing and attract additional deposits (Figure 9.4). The FRS thus has the effect o f providing a decisive halt in the present downward spiral o f the DCCBs and restores them to sustainable financial health. Systemic analysis (using data consolidating al l DCCBs)
Flgure 9 . 4 : Impact of t h e FRS on Lendlng by 10 D C C B a I
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using the same assumptions demonstrate equivalently positive results f rom DCCBs’ participation in the FRS (Figures 9.5-9.7).
Despite benefiting f rom a reduction o f provisioning costs as a result o f the legal and governance reforms, the position o f the DCCBs i f they do not receive assistance fkom the FRS reflects continuing financial weakness, which i s driven by the inabil ity to sufficiently improve their ROA without a capital infusion to relieve the burden o f their nonperforming loan portfolios. In turn, their financial distress severely limits their abil ity to increase lending by making them increasingly less creditworthy intermediaries for lenders and depositors, restricting their capacity to increase the amount o f funds raised for new lending.
53 DCCBs were selected using stratified random sampling. T h e DCCBs are: Akola (Maharashtra); Boudh (Orissa); Ganvhal (Uttaranchal); Jabalpur (Madyha Pradesh); Jaisalmer (Ragasthan); Jalna (Maharashtra); Kodinar (Gujarat); Kumool (Andrha Pradesh); Mau (Uttar Pradesh); and, Surendranagar (Gujarat). 54 The results of the analysis indicate that the amount of assistance provided b y the FRS using 2004 losses as the basis for calculation w i l l provide a sufficient “cushion” to absorb any additional losses incurred by the DCCBs since 2004.
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The analysis o f the DCCBs has been carried out using conservative assumptions regarding the beneficial impact o f non-financial components o f the Go1 Package:
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Figure 9 . 5 impact of the FRS on DCCB Systemic R O A
............................................................
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0 First, financial performance has been projected o n the basis that credit quality will improve less quickly than the improvement seen in the period 2003 to 2005 (the most recent data available), where provisioning requirements were reduced by about 19 percent on an annual basis, whereas the analysis has assumed that this annual rate o f improvement would fa l l to 10 percent, and the amount o f provisions would rise in absolute terms. In reality, the dramatic changes in the governance o f DCCBs and PACS which the new CSAs wil l bring, reinforced by improved management, training, and new and lower cost (due to pooling o f facilities) IT systems, should enable the DCCBs to improve credit quality at a faster rate; and,
0 Second, the analysis has assumed that DCCBs’ financial spreads will remain about the same. Accordingly, the analysis shows a decline (from 5.39 percent in 2006-07 to 4.26 percent f ive years later) in the DCCBs’ net interest margin as DCCBs adopt a prudent approach by slightly increasing their liquidity from about 13 percent o f total assets in 2007 to about 16 percent o f total assets in 2012.
T o summarize, analysis o f the impact o f the FRS at both the systemic and micro level provides a strong basis for concluding that i t will be able to deliver effective financial assistance to the CCS and consequently, to rural credit consumers, by enabling them to access much greater amounts o f reasonably priced credit. The analysis also demonstrates that the benefits f rom the FRS would be heavily leveraged: in the case o f the 10 DCCBs analyzed, credit availability i s increased by about 101 percent over five years (versus 61 percent without the FRS), leveraging the amount o f assistance provided by about 10 times. On a systemic basis, the analysis indicates that the FRS should increase lending by about 112 percent (versus 61 percent without the FRS) leveraging the amount o f assistance provided by about 23 times. The leverage impact o f the FRS at the systemic level i s higher than for the 10 DCCBs because the system as a whole has a higher starting level o f statutory capital and reserves. This means that at a systemic level the FRS assistance creates more total capital available for leveraging. Because positive capital i s highly concentrated in disproportionately few DCCBs the leverage results shown for the 10 DCCBs are more representative o f the expected results f rom the FRS than the systemic results.
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In considering the benefits o f the FRS it should also be borne in mind that this analysis has not incorporated the positive impact o f assistance provided directly to PACS by the FRS, whose own financial resources available for lending would be increased by compensation for past operating losses paid in cash, recovery o f fully provisioned nonperforming loans, and a new abil ity (and the creditworthiness needed) to borrow from commercial banks and raise additional funds from member deposits.
Figure 0 . 1 : Impact of t h e F R S on Sytem-Wide D C C B L e n d i n g
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F i g u r e 9 .7 : I m p a c t of t h e F R S on S y s t e m i c C R A R o f D C C B s
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- - C \ M t h F R S ----)-MthutFRS
Net present value and internal rate of return analysis
Conducting a standard net present value and internal rate o f return analysis for the project i s not straightforward. This i s because the Government’s cost estimates are o f necessity based on relatively o ld data, and because pending completion o f the SAs the true amount o f losses incurred by the PACS cannot be reliably estimated. This in turn makes estimates o f the increases in systemic liquidity, credit and the ensuing benefits uncertain. However, as discussed in the financial analysis section, i t i s possible to estimate both losses and benefits at the level o f the DCCBs (where the data i s also more recent) which, given their role as the primary source o f refinance for the PACS, provides a reasonable proxy for the l ikely impact o f the Go1 Package as a whole. The benefits to the beneficiaries o f improvements in the condition o f DCCBs arise f rom the substitution o f increased amounts o f formal credit for informal, producing a one-for-one increase in borrower incomes equal to the reduction in the interest cost incurred for borrowing. Further benefits, such as the positive impact on rural incomes o f the abil ity to finance new rural economic activities and improvements in the supply and pr ic ing o f agricultural inputs could be substantial but have not been estimated. The costs o f the FRS for DCCBs are as derived from the audited financial statements o f DCCBs for March 31, 2004 (the calculation date for FRS assistance), with the FRS assistance impacting the DCCBs projected 2007 balance sheets (reflecting the moment when FRS assistance will actually be received). In order to calculate the net present value o f the project, the cost o f funding the project i s assumed to be 7.55 percent, the rate o n comparable maturity (5 years) Go1 bonds.
As noted, the unavailability o f accurate PACS data restricts assessment o f the net present value and internal rate o f return o f the program to the proxy provided by the DCCBs. However, the results for a sample o f 10 weaker than average DCCBs drawn from eight states that have signed up so far, are sufficiently positive - the NPV i s estimated at Rs. 87 crores and IRR at 3 1 percent (Table 9.2) and at the systemic level, these values would be even higher. This provides a high degree o f confidence that the project as a whole will have very positive rates o f return.
83
Item
Increase in available DCCB refinance with FRS
Moneylender Minimum Interest Rate DCCB refinance rate to Rural Borrowers
Substitution Cost Benefit
Borrower Cost Savings on Interest Cost of FRS
Net Benefit Discount Rate Net Present Value Internal Rate of Return
84
2008E 2009E 2010E 201 1 E 2012E
322 469 649 867 1,129
30% 27% 24 % 23% 22 % 14% 14% 14% 14% 14%
16% 13% 10% 9% 8%
52 61 65 78 90 20 1
-149 61 65 78 90 7.55%
87 31 %
Annex 10: Safeguard Policy Issues
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
Safeguard Policies Triggered Environmental Assessment (OP/BP 4.01)
Yes N o TBD X
Natural Habitats (OP/BP 4.04)
1 Phvsical Cultural Resources fOP/BP 4.11) I 1 x 1 I
X
Forests (OP/BP 4.36) X
Environmental Category: C
Pest Management (OP 4.09)
The project i s categorized as a Category C project f rom the Environmental Assessment point o f v iew and i t i s unlikely that any o f the Environmental or Social safeguards are triggered. However, a detailed Social and Institutional Assessment carried out with a sample number o f PACS and DCCBs would help in identifying the specific reasons for the malfunctioning o f the Cooperative Credit System in India in terms o f lack o f governance, accountability, transparency, inclusion etc. towards helping identify measures to address them. An assessment o f governance systems in PACS and DCCBs for instance would require looking into their institutional issues, their modes o f transparent and inclusive decision making, systems to avoid elite capture etc. and it i s important that the focus o f the proposed Social and Institutional Assessment i s indeed on identifying ways o f addressing each o f these important areas. The
X
85
Indigenous Peoples (OP/BP 4.10) X
Involuntary Resettlement (OP/BP 4.12) X
Safety of Dams (OP/BP 4.37) X
Projects on International Waterways (OP/BP 7.50) X
Projects in Disputed Areas (OP/BP 7.60) X
project proposes to enable the borrower to identify appropriate technical assistance that can help address these critical issues.
86
Annex 11 : Project Preparation and Supervision
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
Planned Actual P C N review November 2006 November 2006 Ini t ia l PID to PIC December 19,2006 December 19,2006 Ini t ia l ISDS to PIC December 19,2006 December 19,2006 Appraisal March 12, 2007 March 29, 2007 Negotiations April 2007 M a y 21-24,2007 Board approval June 26,2007 Planned date o f effectiveness August 2007 Planned date o f mid-term review July 2009 Planned closing date June 2012
K e y institutions responsible for preparation o f the project: 0
0
Department o f Economic Affairs, (Banking and Financial Sector Division), Ministry o f Finance Government o f India National Bank for Agriculture and Rural Development (NABARD)
Bank staff and consultants who worked on the project included:
Name Title Unit Atul Deshpande Financial Management Specialist S A R F M Aurora Ferrari Carlos Cuevas Dhimant J. Baxi Gabi G. Afi-am Gennady Pi lch Heather Femandes Henry Bagazonzya I rek Smolewski Juan Carlos Mendoza Kadi ja Jama Manoj Jain Ni ra j Verma Shankar Narayanan Tara Vishwanath Vinod Satpathy Xavier Gine Andrew Lovegrove Fr i tz Koenigshoffer Robert Keppler Santhanam k s h n a n Vi jay Mahajan
PSD Specialist Advisor
Sr. Procurement Specialist Young Professional Sr. Legal Counsel Program Assistant
Sr. Rural Development Specialist Sr. Procurement Specialist
Sr. Financial Economist Team Assistant
Sr. Financial Management Specialist Financial Sector Specialist
Sr. Social Development Specialist Lead Poverty Specialist
Team Assistant Economist
Consultant (Bank restructuring expert) Consultant (Procurement)
Consultant (Technology and innovation) Consultant (Procurement)
Consultant (Institutional development)
SASPF CSMPF S A R P S SASPF
L E G M S SASPF
SASPFISASSD ECSPS LCSPF SASPF S A R F M SASPF SASES SASPR SASPF DECRG
Priya Basu Lead Financial Economist (TTL) SASPF The peer reviewers were: Augusto D e l a Torre, Sr. Advisor, FPD; Mar i lou Uy, Sector Director, AFTFS; Renate Kloeppinger-Todd, Advisor SD; and Dina Uma l i Deininger, Lead Specialist, SASSD.
87
Bank funds expended to date on project preparation: 1. Bank resources: US$372,777 2. Trust funds: 3. Total: US$372,777
Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$50,000 2. Estimated annual supervision cost: US$200,000
88
Annex 12: Documents in the Project File INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
ADB. 2006. “Proposed Rural Finance Restructuring and Development Program: Aide-Memoire o f Fact- Finding Mission,” 26 July, 2006.
-. 2006. “Rural Finance (Cooperative Banks) Restructuring and Development Program: Aide- Memoire o f the Appraisal Mission,” 4 October, 2006
-. 2006. “Report and Recommendation o f the President to the Board o f Directors: Proposed Program Loan - India: Rural Finance (Cooperative Banks) Restructuring and Development Program,” Project Number: 36343,24 October 2006.
Basu, Priya. 2005. India ’s Financial Sector: Recent Reforms, Future Challenges. Washington DC: World Bank and Macmillan.
. 2006. Improving Access to Finance for India ’s Rural Poor, Directions in Development Series. Washington DC: World Bank.
Basu, Priya and Pradeep Srivastava. 2005. “Exploring Possibilities: Microfinance and Rural Credit Access for the Poor in India.” Economic and Political Weekly, Vol. XL, No. 17: 1747-1756.
Beck, T., Asli Demirguq-Kunt and Ross Levine. 2004. “Finance, Inequality and Poverty: Cross-Country Evidence.” Washington DC: World Bank.
Bond, Philip and Robert Townsend. 1996. “Formal and Informal Financing in a Chicago Ethnic Neighborhood.” Economic Perspectives 20(4): 3-27. Federal Reserve Bank o f Chicago.
Cuevas, Carlos E. and Klaus P. Fischer. 2006. “Cooperative Financial Institutions: Issues in Governance, Regulation, and Supervision” World Bank Working Paper 82, Washington DC: World Bank
Friedman, Milton. 1957. “The Permanent Income Hypothesis: Comment.” American Economic Review 48: 990-1.
Government o f India, Ministry o f Finance, Department o f Economic Affairs. February 2005. “Report o f the Task Force on Revival o f Rural Cooperative Credit Institutions (Short Term).” (Vaidyanathan Committee).
Government o f India, Ministry o f Finance, Department o f Economic Affairs, Banking Division. January 2006. “Package for Revival o f Short term Rural Cooperative Credit Structure.”
Government o f India, Ministry o f Finance, Department o f Economic Affairs, Fund Bank Division Letter. February 15, 2006. “Proposal o f Banking Division, DEA on “Revival o f Short-Term Cooperative Credit Structure,” and “Concept Note: Strengthening India’s Rural Cooperatives: A Programme for Reforms.”
GTZ. 2006. “Revival Package o f the Short Term Cooperative Credit Structure - Operational and Planning Framework,” Final Draft, June 2006.
Honohan, P. 2004. “Financial Sector Policy and the Poor: Selected Issues and Evidence.” World Bank Working Paper No. 43. Washington DC: World Bank.
89
KfW Banking Group. 2006. “Financial Cooperation with India NABARD XI - Strengthening India’s Rural Cooperatives: Pre-Implementation Assessment Report,” July 2006.
Nair, Ajai and Renate Kloeppinger-Todd. 2007. “Reaching Rural Areas with Financial Services: Lessons from Financial Cooperatives in Brazil, Burkina Faso, Kenya, and Sri-Lanka,” World Bank ARD Discussion Paper 35, Washington DC: World Bank
NABARD. 2007. “Guidelines for Procurement o f Hardware Equipment for Primary Agricultural Credit Societies (PACS),” Final Draft, May 2007.
. 2007. “Guidelines for Development and Procurement o f Software for PACS,” Final Draft, May 2007.
. 2007. “Common Accounting System for the Cooperative Credit Structure: Primary Agriculture Credit Societies,” Draft, March 2007. Mumbai.
. 2007. “Management Information System (MIS) for the Cooperative Credit Structure: Primary Agriculture Credit Societies,” March 2007. Mumbai.
Paxton, Julia. 2006. “An analysis o f Mexico’s PATMIR Project,” Ohio University.
RBI (Reserve Bank o f India). 2005. Report on Trend and Progress of Banking in India 2004-2005. Mumbai.
. 2006. Report on Trend and Progress of Banking in India 2005-2006. Mumbai.
. 2006. “Report on Fuller Capital Account Convertibility.” (Tarapore Committee).
Satyasai, K. J. S and K. C. Badatya. 2000. “Restructuring Rural Credit Cooperative Institutions.” Economic and Political Weekly, January 29,2000: 307-326.
World Bank. 2004. “India: Scaling-up Access to Finance for India’s Rural Poor.” Report No. 30740-IN. Washington DC: World Bank.
. 2006. “India: Crop Insurance Technical Assistance-National Agriculture Insurance Scheme: Market-based solutions for better risk sharing.” Washington DC: World Bank.
. 2006. “EG Review o f World Bank Assistance for Financial Sector Reform.” Washington DC: World Bank.
. 2006. “Lending for Lines o f Credit: An IEG Evaluation.” Washington DC: World Bank.
. 2006. “Financial Sector Assessment Program: IEG Review o f Joint World Bank IMF Initiative.” Washington DC: World Bank.
. 2006. “World Bank Assistance to the Financial Sector: A Synthesis o f IEG Evaluations.” Washington DC: World Bank.
90
. 2006. “INDIA: Strengthening the Rural Cooperative Credit System (CCS), Inception Mission (September 4-20,2006),” Aide Memoire, September 25,2006.
, 2006. “INDIA: Strengthening Rural Cooperative Credit System (CCS), Pre-Appraisal Mission (November 6-20,2006),” Aide Memoire. December 11,2006.
91
Annex 13: Statement of Loans and Credits INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
Difference between expected and actual
disbursements Original Amount in US$ Mil l ions
Project ID F Y Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d
PO75060
PO90585
PO90592
PO78539
PO90768
PO83187
PO78538
PO71160
PO75174
PO97036
P100789
2007
2007
2007
2007
2007
2007
2007
2007
2007
2007
2007
R C H I1 Punjab State Roads Project
Punjab Rural Water Supply & Sanitation
T B I1
TN IAM W A R M
Uttaranchal RWSS
National H N / A I D S Control Project I11
Kamataka Health Systems
India AP D P L 111
Orissa Socio-Econ Dev Loan I1
AP Community Tank Management Project TN Empwr & Pov Reduction
TN Urban 111
Karn Municipal Reform
Power System Development Project 111
Kamataka Panchayats Strengthening Proj
F A L G Brick Project
VSBK Cluster Project
NAIP
Mid-Himalayan (HP) Watersheds
TN H E A L T H SYSTEMS
Madhya Pradesh Water Sector Restructurin
DISEASE SURVEILLANCE
Lucknow-Muzaffarpur National Highway
Rural Roads Project
Hydrology I1
M A H A R WSIP
Assam Agric Competitiveness
IN SME Financing & Development
India Tsunami ERC ALLAHABAD BYPASS
Uttar Wtrshed
MAHAR RWSS
RAJASTHAN H E A L T H SYSTEMS DEVELOPMENT
GEF Biosafety Project
Kamataka UWS Improvement Project
TN ROADS
UP ROADS
Chatt DRPP
0.00
250.00
0.00
0.00
335.00
0.00 0.00 0.00
150.00
150.00
94.50
360.00
0.00 154.00
170.00
150.00
120.00
250.00
141.83
75.00
75.00
94.50
0.00
0.00 0.00
0.00
0.00
0.00 0.00 0.00
0.00
0.00 0.00
0.00
0.00 0.00 0.00
0.00
0.00 0.00
0.00 0.00
0.00
0.00
0.00
0.00 0.00 0.00 0.00
0.00
0.00 0.00
0.00
0.00
0.00
363.72 250.00
157.40
159.29
485.92
127.33
256.52
144.20
75.64
75.36
190.39
10.00
3.07
21.46
-1 1 .oo 0.00
4.83
0.00 2.20
-151.17
-150.65
0.00
0.00
0.00
0.00
0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00
PO79708
PO83780
P 0 7 9 6 7 5
PO86414
PO78832
PO901 63
PO91453
PO92735
PO93720
PO75058
PO73370
2006
2006
2006
2006
2006
2006
2006
2006
2006
2005
2005
0.00 300.00
216.00
400.00
0.00 0.00
0.00 0.00 0.00
0.00
394.02
120.00
0.00
0.00 0.00
120.00
0.00
0.00
200.00
60.00
110.83
0.00
0.00 0.00 0.00
0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00 0.00 0.00
0.00 0.00
0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00 0.00
0.00 0.00
0.00
0.00 0.00
20.06
0.00
111.50
262.16
198.26
313.55
98.54
4.40
2.88
185.05
53.41
79.91
363.81
-2.37
37.91
1.19
-86.45
-25.73
0.00 0.00
-11.18
3.20
23.53
81.70
0.00
0.00
0.00
0.00 0.00
0.00
0.00
0.00 0.00
26.54
0.00
PO73651
PO77856
PO77977
PO84632
PO84790
PO84792
PO865 18 PO94513
PO73776
PO78550
PO73369
PO50655
2005
2005
2005
2005
2005
2005
2005
2005
2004
2004
2004
2004
0.00
620.00
99.50
104.98
325.00
0.00
120.00
0.00
240.00
0.00
0.00 0.00
68.00
0.00
300.00
0.00
0.00
154.00
0.00
465.00
0.00
69.62
181.00
89.00
0.00
0.00 0.00
0.00 0.00
0.00 0.00 0.00
0.00 0.00 0.00
0.00
0.00
0.00 0.00
0.00 0.00
0.00
0.00 0.00
0.00
0.00 0.00
0.00
0.00
0.00
0.00 0.00 0.00
0.00
0.00 0.00
0.00
0.00 0.00
0.00
61.38
453.33
212.41
94.04
292.42
141.81
5.00
405.20 121.26
61.53
71.01
69.54
26.47
-30.00
-17.38
39.06
9.42
42.11
3.33 255.54
84.46
1.11
-9.12
43.65
0.00
0.00 0.00
-2.07
0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00
PO79865
PO82510
PO50649
PO67606
PO76467
2004
2004
2003
2003
2003
0.00 39.50
348.00
488.00
0.00
0.00 0.00
0.00
0.00
112.56
0.00
0.00
0.00
0.00 0.00
1 .oo 0.00
0.00
0.00 0.00
0.00
0.00
0.00
0.00 20.06
0.49
16.48
239.02
291.12
78.11
0.48
10.98
103.55
202.93
57.02
0.00
0.00
0.00
0.00
0.00
92
PO7 1272
PO72123
PO75056
PO73094
PO74018
PO72539
PO7 1033 PO50647
PO69889
PO50653
PO4061 0
PO50668
PO10566
PO50658
PO55454
PO55455
PO59242
PO672 16
PO70421
PO7 1244
PO59501
PO50657
PO49770
PO10505
PO09972
PO50646
2003
2003
2003
2003
2002
2002
2002
2002
2002
2002
2002
2002
2001
2001
2001
2001
2001
2001
2001
2001
2000
2000
2000
2000
2000
1999
AP RURAL POV REDUCTION
Tech/Engg Quality Improvement Project
Food & Drugs Capacity Building Project
AP Comm Forest Mgmt
Gujarat Emergency Earthquake Reconstruct KERALA STATE TRANSPORT
KARN Tank Mgmt
UP WSRP
M I Z O R A M ROADS
K A R N A T A K A RWSS I1
RAJ WSRP
MUMBAI URBAN TRANSPORT PROJECT Gujarat Highways
TECHN EDUC I11
KERALA RWSS
Rajasthan DPEP I1
M P DPIP
K A R WSHD DEVELOPMENT
Kamataka Highways
Grand Trunk Road Improvement Project
T A for Econ Reform Project
UP Health Systems Development Project
REN EGY I1
RAJASTHAN DPIP
Natl Highways I11
UP Sodic Lands I1
Total:
0.00
0.00
0.00 0.00
0.00
255.00
0.00 0.00
0.00
0.00
0.00
463.00
381.00
0.00
0.00 0.00
0.00 0.00
360.00
589.00 0.00 0.00
80.00
0.00 516.00
0.00
150.03
250.00
54.03
108.00
442.80
0.00 98.90
149.20
60.00
151.60
140.00
79.00
0.00 64.90
65.50
74.40
110.10
100.40
0.00
0.00
45.00
110.00
50.00
100.48
0.00 194.10
0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00
0.00
40.11
0.00
0.00
115.24
0.00 25.07
40.11
0.00
15.04
15.04
0.00
101.00
0.00
12.27
0.00 20.06
20.06
0.00
12.53
12.03
30.09
26.00
0.00
25.16
0.00
25.43
94.99
40.80
46.59
97.34
116.95
53.36
97.10
24.31
64.37
74.25
359.46
19.51
6.67
7.89
22.82
6.16
44.94
2 1.72
149.62
15.08
3 1.27
20.09
25.17
91.26
0.60
0.09 28.90
26.39
2.50
135.90
57.62
51.89
111.21
8.37
50.41
45.15
240.27
120.51
0.33
11.36
11.99
12.86
47.93
2 1.72
162.15
22.73
50.33
43.96
14.99
116.42
-3.16
0.00
-47.06
0.00
0.00
37.98
0.00
-0.06
0.00
0.00
0.00
0.00 0.00
19.51
-2.11
-1.97
0.00
-6.87
3 1.07
0.00
0.00 11.39
10.18
-3.60
15.01
116.42
-6.22
7,318.50 6,238.78 0.00 1.00 549.93 8,131.14 1,966.97 198.14
INDIA STATEMENT OF IFC’s
Held and Disbursed Portfolio In Mi l l ions o f U S Dollars
Committed Disbursed
F Y Approval Company
IFC IFC
Loan Equity Quasi Partic. Loan Equity Quasi Partic.
2005
2006
2005
2005
2002
2003
2005
2006
2003
ADPCL
AHEL
AP Paper Mills
APIDC Biotech
A T L
A T L
A T L
Atul L td BHF
39.50 0.00
35.00
0.00
13.81
1 .oo 9.39
16.77
10.30
7.00
5.08 5.00
4.00
0.00
0.00 0.00 0.00
0.00 1
0.00
0.00 0.00
0.00
0.00
0.00 0.00 0.00
10.30
0.00
0.00 0.00
0.00
9.36
0.00 0.00 0.00
0.00
0.00 0.00
0.00 5.08
25.00 5.00 0.00 2.01
13.81 0.00 0.68 0.00
0.00 0.00
0.00 0.00 10.30 0.00
0.00
0.00
0.00
0.00
0.00
0.00 0.00
0.00
10.30
0.00
0.00 0.00
0.00
9.36
0.00 0.00
0.00
0.00
93
2004
2001
2003 2001
2005
1984
2003
2006
1990
1992
2004
2004
2002
2005
2006
2003
2005
2006
2005
2003
2006
2001
2006
1994
2003
1998
2006
1998
2005
2006
2006
1996
2001
2006
2005
2005
2003
2006
2006
2002
2003
2001
1996
1999
2000
2003
BILT
BTVL
Balrampur
Basix Ltd.
Bharat Biotech
Bihar Sponge
CCIL
CCIL
CESC
CESC
CGL
CMScomputers
COSMO
COSMO
Chennai Water
DQEL
DSCL
DSCL
Dabur
Dewan
Federal Bank
GTF Fact
GTF Fact
GVK HDFC
IAAF
IAL
IDFC
IDFC
IHDC
IHDC
Indecomm
India Direct Fnd
Indian Seamless
JK Paper
K Mahindra INDIA
KPIT
L&T
LGB
Lok Fund
MMFSL
MSSL
MahInfra
Montalvo
Moser Baer Moser Baer
Moser Baer
Nevis
NewPath
0.00
0.43 10.52
0.00 0.00
5.70
1 S O 7.00
4.61
6.55
14.38
0.00
2.50
0.00
24.78
0.00
30.00
15.00
0.00 8.68
0.00
0.00 0.00
0.00 100.00
0.00 0.00
0.00 50.00
6.94
7.90
0.00
0.00
6.00
15.00
22.00
11.00
50.00
14.21
0.00
7.89
0.00 0.00 0.00 0.00
0.00
12.75
0.00
0.00
0.00 3.98
0.00
0.98
0.00
0.00
0.00
2.00
0.00
0.00 0.00
10.00
0.00
3.73 0.00
1 S O
0.00 0.00
14.09
0.00
28.06
1.20
0.00 4.83
0.00 0.47
9.79
10.82
0.00
0.00
0.00 2.57
1.10
0.00
7.62
0.00 2.50
0.00
4.82
2.00
0.00
2.29
10.00 3.00 0.82
8.74
10.54
4.00
9.31
15.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00
4.50 0.00 0.00 0.00
0.00 0.00
0.00 12.40
0.00 0.00
0.00 14.59
0.00 0.00
2.50 0.00 0.00 0.00
0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00
0.99 0.00
0.00 0.00
0.00 100.00 1 0.00 0.00
0.00 0.00
0.00 0.00
0.00 100.00
0.00 0.00 0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00 7.51 0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00
0.00
0.43
10.52 0.00 0.00 5.70
0.59
7.00
4.61
6.55
7.38
0.00 2.50
0.00
0.00
0.00 30.00
0.00 0.00
8.68
0.00 0.00
0.00
0.00
100.00
0.00
0.00 0.00
50.00 0.00
0.00
0.00 0.00 6.00
0.00
22.00
8.00
50.00
0.00
0.00 7.89
0.00 0.00 0.00 0.00
0.00
12.75
0.00
0.00
0.00 3.98
0.00 0.98
0.00 0.00
0.00 2.00
0.00
0.00 0.00
0.00 0.00 3.73
0.00
1.50
0.00
0.00 14.09
0.00 23.99
1.20
0.00
4.83
0.00
0.30
7.70
10.82
0.00 0.00
0.00 2.57
0.66
0.00
7.38
0.00
2.50
0.00
4.82
0.00
0.00
2.20
0.79
1.08
0.82 8.74
10.54
4.00
8.31
15.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00
3.30 0.00
0.00 0.00
0.00 0.00 0.00 12.40
0.00 0.00 0.00 14.59
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00
1 S O 0.00
0.00 0.00 0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00
0.99 0.00 0.00 0.00 0.00 100.00
0.00 0.00
0.00 0.00 0.00 0.00 0.00 100.00
0.00 0.00 0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00 0.00 0.00 7.51 0.00
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00
0.00 0.00
0.00 0.00
94
2004
2003
2001
1997
2006
2004
2004
1995
2004
2005
2005
2001
1997
2000
1995
2004
2001
2003
2004
2000 2002
1998
2005
2004
1996
2005
2002
2001
2005
1997
1997
2006
NewPath
Niko Resources
Orchid
Owens Coming
PSL Limited
Powerlinks
RAK India
Rain Calcining
Rain Calcining
h m k y Ruchi Soya
SBI
SREI
SREI
Sara Fund
SeaLion
Spryance
Spryance
Sundaram Finance
Sundaram Home
Sundaram Home
TC W/ICICI
TISCO
UPL
United Riceland
United Riceland
Usha Martin
Vysya Bank
Vysya Bank
WIV
Walden-Mgt India
iLabs Fund I1
0.00 24.44
0.00
5.92
15.00
72.98
20.00
0.00 10.00
3.74
0.00 50.00
3.21
6.50
0.00 4.40
0.00 0.00 42.93
0.00
6.71
0.00 100.00
15.45
5.63 8.50
0.00
0.00
0.00 0.00
0.00 0.00
2.79
0.00 0.73
0.00
4.74
0.00
0.00
2.29
0.00
10.28
9.27
0.00 0.00
0.00 3.43
0.00 1.86
0.93
0.00 2.18
0.00 0.80 0.00
0.00
0.00
0.00
0.72
3.66
3.51
0.37
0.01
20.00
0.00 0.00 0.00
0.00
0.00
0.00 0.00
0.00 0.00 0.00
0.00 0.00
0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00 0.00
0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00
0.00
0.00
0.00
0.00 0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00
0.00 0.00
0.00 0.00
0.00 0.00 0.00
0.00 0.00 0.00
0.00
0.00 0.00
300.00
0.00
0.00 0.00
0.00
0.00
0.00 0.00
0.00 0.00
0.00 24.44
0.00
5.92
0.00
64.16
20.00
0.00
10.00
0.00 0.00
0.00 3.21
6.50
0.00 4.40
0.00 0.00
42.93
0.00
6.71
0.00 0.00
15.45
5.63 5.00
0.00
0.00
0.00 0.00
0.00 0.00
2.49
0.00 0.73
0.00 4.54
0.00 0.00 2.29
0.00
0.00 6.77
0.00
0.00
0.00 3.43
0.00
1.86
0.93
0.00 2.18
0.00 0.80
0.00
0.00 0.00 0.00 0.72
3.66
3.51
0.37
0.01
0.00
0.00 0.00
0.00 0.00
0.00
0.00
0.00
0.00 0.00 0.00
0.00 0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00 0.00
0.00 0.00
0.00
0.00 0.00
0.00
0.00 0.00
0.00 0.00
0.00
0.00 0.00
0.00 0.00
0.00 0.00
0.00
0.00 0.00 0.00
0.00 0.00
0.00
0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00 0.00 0.00
Total portfolio: 956.52 249.41 42.30 536.35 604.74 175.91 38.60 236.35
Approvals Pending Commitment
FY Approval Company Loan Equity Quasi Partic.
2004 CGL 0.01 0.00 0.00 0.00 2000 APCL 0.01 0.00 0.00 0.00 2006 Atul Ltd 0.00 0.01 0.00 0.00 2001 Vysya Bank 0.00 0.00 0.00 0.00 2006 Federal Bank 0.01 0.00 0.00 0.00 2001 GI Wind Farms 0.01 0.00 0.00 0.00 2004 Ocean Sparkle 0.00 0.00 0.00 0.00 2005 Allain Duhangan 0.00 0.00 0.00 0.00
Total pending commitment: 0.04 0.01 0.00 0.00
95
Annex 14: Country at a Glance
INDIA: STRENGTHENING RURAL CREDIT COOPERATIVES PROJECT
Agncuiture 3 5 2 1 0 7 3 9 industry 6 5 5 7 8 6 8 7
Manufacturing 6 7 5 4 8 1 9 0 Services 6 7 8 1 9 9 100
Household final consumption expenditure 5 7 5 5 128 4 9 General gov't final consumption expenditure 4 2 4 7 0 0 156
I nd ia at a glance
40
20
0
m 01 02 03 C4 05
4 0
POVERN and SOCiAL
2005 Population, mld-year (millionsJ GNi per capita (Mas method, US$) GNi (Atlas mthod, US$ blllionsl
Average annual orowth, 1999-05
Population (56) Labor force (%J
Most recent estimate (latest year available, 199945) PovePiy (56 of population below national poverty line) Urban population (% of total population) Life expectancy at birth (vearsl infant mortality (per 1,0001ive births) Chiid malnutrition (56 ofchildren under 5) Access to an improved water source I% ofpopulationJ Literacy (56 of population age 15+) Gross primary enrollment (% ofschool-aQe wpulatlonJ
Male Female
KEY ECONOMiC RATiOS and LONG-TERM TRENDS 1985
GDP (US$ billions) 227.2 Gross capital formationiGDP 23.7 ~xports of goods and servicesiGOP 5.4 Gross domestic savingsiGDP 19.5 Gross national savingsiGDP 19.9
Current account balanceiGDP -2.3 interest payments/GDP 0.9 Total debWGDP 18.0 Total debt serviceiexports 23.0 Present value of debVGDP Present value of debvexports
198585 1995.05 (average annualgrowth) GDP 5.5 6.0 GDP per capita 3.4 4.3 Exports of goods and services 10.9 9.6
India
1,0946 730
797.9
1.5 1.9
29 28 63 62 47 86 61
116 120 112
1995
355.2 26.5 11.0 25.1 26.4
-1.8 1.4
26.6 27.8
2004
8.5 7.0
18.2
South Asia
1,470 684
1,005
1.7 2.1
29 63 66 45 84 60
110 116 105
2004
694.7 28.5 18.5 29.1 31.4
-0 7 0.7
17.5 7.5
15.8 72.7
2005
8.7 7.2
21.8
LOW. income
2.353 580
1,364
1.9 2.3
31 59 80 39 75 62
104 110 99
2005
797.6 31.1 20.7 27.3 29.5
-1.3 0.7
16.1 9.1
2005.09
7.4 6.0
16.7
Deveiopnwnt diamond'
Life expectancy
T 1
GNi Gross
capita enroilmen' per pnmar)
I
Access to improved water source
~ -India Low-income group
Economic ratioa'
Trade
Domestic Capita savings formation
1 indebtedness
---India Low-income gmup
STRUCTURE of the ECONOMY 1985 1995 2004 2005
z z ;E ;;: (% of GDP) AQnCulture industry
Manufactunng 164 181 160 159 Services 399 436 532 536
Household final consumption expenditure 674 638 635 605 Genemi gov't flnai consumption expenditure 114 108 113 121 imports of goods and services 7 8 122 217 244
1985-95 199545 [Growth of exporta and imports 1%) I
5 4 6 6 128 134 ---ExpoIts -0-impoIts 9 9 7 0 450 220
Note: 2005 data are preliminary estimates Group data are to 2004 The diamonds show four key indicators in the country (in bold) compared with its incomegroup average. if data are missing. the diamond will be incomplete.
96
