The Small-Scale Enterprise Credit Program under the Second and Third Calcutta Urban Development Projects : an assessment

THE WORLD BANK Internal Discussion Paper ASIA REGIONAL SERIES Report No. IDP-28 The Small-Scale Enterprise Credit Program (S.S.E.R) under the Second and Third Calcutta Urban Development Projects (C UDP II and CUDP Ill) -AnAssessment- Friedrich Kahnert March 1989 The views presented here are those of the author, and they should not be interpreted as reflecting those of the World Bank. The Small-Scale Enterprise Credit Program (S.S.N.P.) under the Second and Third Calcutta Urban Development Projects (CUDP II and CUDP III) - An Assessment - by Friedrich Kahnert Senior Economist Asia Regional Office - The World Bank The opinions expressed in this report are those of the author and do not necessarily reflect the position of the World Bank, the Calcutta Metropolitan Development Authority (CMDA) or any other institution active in the program that is analyzed. Washington, D.C., June 1988 The Small-Scale Enterprise Credit Program (S.S.E.P.) under the Second and Third Calcutta Urban Development Projects (CUDP II and CUDP III) - Abstract - This report traces the history and analyzes the impact of a Bank- supported micro-enterprise lending program from appraisal in 1976 to mid- 1988. This program is one of the largest of such schemes in the Bank's urban project portfolio and, in the five years to the end of March 1988, it made more than 32,500 loans for a total disbursement exceeding Rs 145 million. The impact analysis in this report leaves no doubt that such lending reaches the urban poor and is associated with highly favorable income and employment effects. Average incomes of a sample of 2000 borrowers increased by more than 80 following the loans and 1200 new employment opportunities were created in their enterprises. In the last five years, the program may thus have been instrumental in producing close to 20,000 new jobs in the Calcutta Metropolitan District, at an average cost of less than US$ 600 per job. The lending program, which is carried out by commercial banks with the assistance of the Calcutta Metropolitan Development Authority and a number of non-governmental and municipal organizations, has some features that are unique to the Indian policy environment. But the report also brings out r number of general lessons that are of value in other situations. Among these, the fact that such schemes can be financially viable, that credit delivery can be successful without costly technical assistance and training, and that private or public grass-roots organizations have a vital role to play, may be the most telling. In this, the report adds one more piece to the growing evidence that micro- enterprise lending provides a highly promising avenue for efficient employment and income growth. List of Contents Paras. I. Introduction, Summary and Conclusions 1.01 - 1.18 II. The Experience under CUDP II 2.01 - 2.18 III. The Transition to and Experience under CUDP III until 1987/88 3.01 - 3.20 IV. Impact Assessment 4.01 - 4.18 V. Some Problems 5.01 - 5.07 VI. The Future of the S.S.E.P. 6.01 - 6.03 Table 1 Calcutta Small-Scale Enterprise Credit Scheme - Loan Disbursements Table 2 Employment Impact of 631 Loans under CUDP II Table 3 Income Increases Recorded for 631 Borrovers under CUDP II Table 4 Employment Impact of 2000 Loans under CUDP III Table 5 Income Increases Recorded for 2000 Borrowers under CUDP III Table 6 Loan Recovery Rates by Geographical Zone and by Major Bank List of Abbreviations CMDA - Calcutta Metropolitan Development Authority CMD - Calcutta Metropolitan District CUDP - Calcutta Urban Development Project CSSI - Cottage and Small-Scale Industries Department (of GOVB) DRI - Differential Rate of Interest GO1 - Government of India GOWS - Government of West Bengal KBPS - Kalikata Bustee Pragathi Sangstha, a federation of 10 social service agencies active in Calcutta SSE - Small-Scale Enterprise SSEP - Small-Scale Enterprise Program SLBC - State Level Banking Committee -1- I. Introduction, Summary and Conclusions 1.01 This note is based on material gathered mostly in the course of appraisal and supervision of the Second and Third Urban Development Projects of the World Bank in Calcutta. It reflects the situation as of April 1988. The S.S.N.P. under CUDP II 1.02 When the Small-Scale Enterprise Program (S.S.E.P.) under CUDP II was appraised in 1976 and early 1977, it was expected that the program would consist of a credit scheme and an extension service active in 10 Calcutta slums and 5 geographically concentrated manufacturing sub-sectors. In addition, studies were pl,nued to prepare expansion of the scheme in a subsequent World Bank-assisted operation and a monitoring system was to be put in place to monitor and record the performance and impact of the S.S.E.P. 1.03 Of these activities, only the credit scheme and parts of the monitoring system were actually imlemented. Technical assistance was never provided in any form other than incidentally during unsystematic credit supervision activities. What studies were done did not meet the initial objectives and the impact part of the monitoring activity was of an ad-hoc and partial nature. 1.04 The credit scheme started slowly and continued at a low level of achievement for the first 2 112 years of implementation; rn average, less than 10 loans were disbursed per month. Among the many reasons for this disappointing performance, a low level of commitment to the program b- all levels of CHDA, by CSSI and by the participating commercial banks ranks high. Cumbersome sub-loan identification, appraisal and disbursement procedures also contributed, as did the early withdrawal for internal reasons of the association of private voluntary agencies that was part of the implementing arrangements. Also, commercial banks initially joined the program in the expectation they would receive World Bank finance. 001 decided the banks should use their own resources, and World Bank funds would only be used to finance CHDA's administrative cost of the scheme. This removed an important incentive for the banks. 1.05 As of September 1980, however, the program started to expand at significant rates. By the end of the 5-year implementation period. i.e., in the first quarter of 1983, the program was disbursing 244 loans per month equivalent to nearly 3,000 per annum. The first significant expansion of the program was due very largely to the Bank of Baroda, which joined the program in September 1980 and which had previous experience with such lending and more appropriate operating procedures. 1.06 About one year later, another significant growth spurt coincided with the appointment of a highly motivated project coordinator in CHA, who introduced changes in procedures and approach, many of which had previously been identified as desirable by and in the course of World Bank supervision missions. This appointment itself reflected the growing importance -2- attached to the S.S.E.P. by the highest levels of CMDA management. At the loan closing date of March 31, 1983, almost 3,500 loans had been disbursed for a total of about Rs 8.9 million. This was about 73% of the appraisal target for the number of loans and just short of 30% of the targeted total loan amount. At the same time, participating commercial banks judged the repayment experience to be better than expected and quite acceptable. 1.07 These mixed results were nevertheless encouraging, given the low level of achievement in the first half of the 5-year project period. Moreover, evidence on the impact of the loan scheme on incomes and employment, though partial and uncertain in many respects, was highly favorable. For a sample of 631 borrowers, for example, employment rose by 459 or 62% and household incomes of borrowers from their enterprises increased by an average of at least 60Z. While tailoring showed the highast rates, income increases in the lowest group, trade and services, still averaged more than 222 and loan amounts per added job in manufacturing and repairs other than tailoring worked out at well below Rs 5,000, one-twelfth the cost at that time of a new job in small-scale industries supported by the CSSI in Calcutta. Compared to average loan amounts, annual incomes rose by averages of over 180% for tailors, close to 682 for other manufacturing and repairs and 45? for trade and services, not counting incomes received by additional hired help and the savings element in the repayment of those loans used to acquire durable assets. Only a fraction of those increases was due to replacement of high-cost money- lender funds by lower cost bank credit, which in itself also has desirable welfare effects. Program Changes and Experience under CUDP III 1.08 These favorable pointers on the impact of micro-enterprise loans together with the operating experience in the later year of CUDP II led to the inclusion of a metropolitan-vide S.S.E.P. in CUDP III. Target numbers of loans and the overall lending amount were raised from 4,800 loans and Rs 30 million in CUDP II to 42,600 loans and RS 211.7 million in CUDP III, a highly ambitious target by any standard. This reflected the strong emphasis given to the program by West Bengal government authorities. 1.09 The operating experience of CUDP II led to other changes in the program. For one thing, CMDA cash balances are being deposited deliberately though not yet fully systematically, with bank branches that perform well under the S.S.E.P.. This instrument has proven to be a powerful tool to motivate branch managers, who are pivotal in the S.S.E.P. Secondly, the separate delivery of technical assistance through an extension system was not included in CUDP III because experience had proven the existence of a very large target group of enterprises -hat can make good use of loans without technical help other than what can be provided as part of credit supervision. 1.10 Thirdly, based on the positive test experience with one of the municipalities in the CMD, all municipalities as well as the 3 corporation areas and two "notified areas" in the CHD are now involved in screening -3- loan application aad in loan follow-up activities. While this has reduced the numerical importance of clubs and N0s in these roles, they remain important at formal and inforl levels. 1.11 The number of banks participating in the program has also increased and now totals 20, including one Gramin Bank, with some 400 bank branches actively involved. Last but not least, a deliberate effort is being made under CUDP III to ease the transition of borrowers from the highly subsidized DRI rate (4? interest per annum) to being regular bank customers at the going commercial rate. The instrument used is to provide a one-time ex-post interest rate subsidy to those who no longer qualify for DRI loans because their income exceeds the Rs 3,000 p.a. ceiling (revised to Rs 7,200 in 1966) and who repay their loan on time; the subsidy of 4 114 percentage pints is limited to those whose income does not exceed Rs 7,200 p.a.; this ceiling is expected to be raised to Rs 12,000 p.a. following the higher ceiling for qualification under the DRI scheme. 1.12 It had become clear already in 1983 and 1984 that CHDA's staff resources for the S.S.E.P. would have to be increased and staff training provided if the program was to come close to its ambitious targets. Staff resources were increased more than three-fold from 1985 to 1987 and staff training was also provided. The program was also decentralized into six zonal offices, beginning in 1984. 1.13 In the initial 5-year implementation period of CUDP III, the S.S.E.P. has disbursed over 32,500 loans for a total of Rs 145.4 million, or 76.5% of the target number of loans and 68.7% of targeted loan amounts. The programs is now within one year of reaching or exceeding the initial target. 1.14 Though the data produced by an expanded impact monitoring system still have significant shortcomings, the employment and income impact of CUDP III loans appears, if anything, evrn more favorable than of those under CUDP II. Annual incomes of a sample of 2000 borrowers have risen by more than 802 over their level before tha loans were taken; as a percentage of loan amounts, these increases average 762. And employment increases in these enterprises average close to 352 for a total of 1200 new jobs. If this employment increase is representative of the program as a whole, the S.S.E.P. has produced between 19,000 and 20,000 jobs under CUDP III. 1.15 By the end of 1986, the arrears position of the total S.S.R.P. loan portfolio had deteriorated to about 30% of loan servicing in arrears compared to about 21% for a restricted sample of loans in 1981. This was probably a consequence of CMDA staff constraints and of giving top priority to program expansion in the earlier years of CUDP 111. Since then, most of the banks and the 8.S.E.P. staff of CMDA put increasing emphasis on loan repayments and the arrears percentage has declined to 262 between November 1986 and February 1988. Further improvement is anticipated, but even now the repayment performance of the S.S.E.P. loan is decidedly superior to that of any other similar scheme in India. This has strengthened the commercial banks' commitment to the program; it has also prompted the National Commission on Urbanization to consider replicating the scheme in other Indian cities. -4- Some General Lessons 1.16 The Calcutta experience holds some lessons for efforts of this type elsewhere. The most Important of these can be summarized as followes (a) strong commitment by the management of participating institutions and, above all, by the leadership of the micro. enterprise support scheme itself, is a key precondition for success; (b) unless the micro-enterprise program directly finances the loans, which is not the case with the S.S.E.P., it is very helptul if it can strengthen the program by using other leverage wherever micro-credits are given or administered by other institutions the use of cash deposits with well- performing banks or their branches is one promising instrument; (c) credit schemes do not necessarily have to be coupled with technical assistance delivery; large numbers of existing small enterprises may be helped with credit alone and costly technical assistance efforts should be undertaken only when the need for them is clearly provent (d) the catalytic role, assumed in this case by CHDA, of linking potential borrowers with the formal financial system is vital for the success of these schemes; (e) pre-screening of borrowers, some follow-up activities and perhaps loan repayments through grass-roots private voluntary agencies and possibly the staff working for elected local bodies can greatly reduce the cost of such schemes to the financial institutions involved; their local knowledge greatly helps in selecting the more credit-worthy borrowers. 1.17 Some other lessons are implicit in the Calcutta experience. One is that programs which are set up to expand substantially need to start planning for this expansion early on in their life. In particular, program goals need to be matched with a staffing and staff training plan and with performance standards and objectives. Secondly, an impact monitoring and feedback system should be implemented from the start and could prove an indispensable management tool. Thirdly, physical decentralisation of program staff into their operational areas is helpful, perhaps necessary. Finally, it is Important that cost consciousness be developed among the participating institutions and that costs be recorded clearly and consistently. 1.18 Some other features of the Calcutta program may not be easily replicable elsewhere. In the early years, participating banks relied almost exclusively on highly-subsidised Differential Rate of Interest (DRI) lending, mostly because 90Z of such loans were guaranteed by the Reserve Bank of India; non-DRI loans carried a lower guarantee of 752.11 While 11 This preferential treatment of DRI loan was removed in 1984. -5- reliance on subsidized DRI loans has declined, it is still significant. Secondly, commercial banks in India are held to a complex set of lending targets the S.S.E.P. doubtless benefited from falling squarely into these targets. Finally, the high degree of social responsibility that appears to characterize the Calcutta banking community and that ts one of the driving forces of the S.S.I.P. may not exist to the same extent elsewhere. II. The Experience Under CUDP II Expectations at Appraisal 2.01 Late in 1976, the Bank's CUDP II appraisal mission agreed with CHDA tLat the authority should complement its physical infrastructure orientation with efforts to support the economic activities of slum dwellers. CMDA subsequently surveyed such activities in 10 Calcutta slums and also studied 5 concentrations of small enterprises in manufacturing activities, i.e. light engineering, tailoring, leather tanning, veneer making, and clay modelling. 2.02 These surveys and studies led to the inclusion of small-scale enterprise program (S.S.E.P.) component in CUDP II, consisting of 4 subcomponents as followas (a) a credit scheme; (b) an extension ser7ice; (c) studies to prepare expansion of the above subcomponents in a subsequent bank operationt and (d) a performance monitoring system. 2.03 The program underwent some changes between appraisal and Board approval; the following was finally agreed: (a) the Government of India (GOI) would direct 4 comercial banks2/ to make Rs 30 million available for loans to the target entrepreneurs over a period of three years. The Bank would not disburse against these loans. Loans would bear interest at 10 to 122 per annum and would consist primarily of short-term working capital loans (902), but could cover investment needs as well. Maximum maturity of loans would be 10 years and repayment schedules would be *flexible'. (b) The Cottage and Small-scale Industries Department (CSSI) of the Government of West Bengal (GOWB) would assign 20 extension workers to provide technical assistance to the tatget group in the Calcutta Metropolitan District (CMD). No such extension service 21 Allahabad Bank, State Bank of India, United Commercial Bank and United Bank of India. Soon after approval of the program the Central Bank of India also joined. -6- was then in existence in the CMD and CSSI would closely cooperate in this effort with Ealikata Bustee Pragati Sangstha (KBPS), a federation of 10 social service organisations active in Calcutta. This subcomponent was expected to be essential for the success of the credit scheme. (c) CMDA would commission consultants to study the SSE potential in the CMD as well as the subsectoral activities of particular importance in the district and survey the SSEs in all the CMDs slum areas. These activities were to serve as a basis for identifying a second, much larger phase of the S.S.E.P.. (d) CMDA with the help of its own social workers and that of the CSSI extension officers would monitor the performance of borrowers, participating commercial banks, the extension service and the Coordinating Committee that was set up among all participating institutions under the chairmanship of CMDA. 2.04 The program would be active in the 10 alums and 5 geographically concentrated subsectors that had been surveyed. It was also expected that loans would be available to enterprises settling in the industrial estate that was to be established under CUDP 11 in East Calcutta. Target enterprises were defined as those with less than Rs 100,000 of total capital employed and there would be a ceiling of Rs 20,000 on individual loans. These ceiling covered virtually all enterprises in the surveyed bustees; the average monthly income of these firms was Rs 400 for an average per capita income in the owner's family of less than Rs 720 per annum. Enterprises in the bustees were to be eligible for credit regardless of their sector of activity, i.e. the program was not limited to industrial activities. It was expected that, apart from loans connected with the East Calcutta industrial estate, 4,800 loans would be sanctioned for an average of Rs 6,250 per unit. 2.05 In hindsight, it also worth noting that there was no attempt to simplify or adapt collateral requirements, loan approval, disbursement and collection procedures of commercial banks to the capacities and needs of target entrepreneurs. Similarly, no attempt was made to modify the registration requirement imposed by CSSI on any enterprise seeking CSSI assistance or any of the other bureaucratic procedures affecting SSE support. The scheme was considered experimental and no quantification of expected benefits was attempted. However, such benefits were expected in employment generation, income increases for loan recipients and through income redistribution following the replacement of high-cost credit from money lenders (estimated to charge 80 to 120% per annum at that time) by a much lower-cost bank credit. Strong doubts were expressed inside the Bank that substantial income and employment effects could be obtained with such small loan operations and the component was thought to run a very high risk of defaults. Quantitative Achievements 2.06 Only the credit subcomponent and some of the monitoring activities were actually implemented. CSSI assigned only half a dozen staff to the -7- program and these never acted in their capacity as technical assistance agents but were soon absorbed by assisting the banks with loan generation activities (see further discussion below under Owhat happened*). Only one study was ever commissioned and its tems-of-reference and results did not meet the objective of the study sub-component; no further SSE surveys were made. 2.07 Even the credit sub-component, after a brief flurry of activity following CUDP effectiveness in April 1978, stalled and nearly 2 1/2 years later, at the end of August 1980, only about 250 loans had been sanctioned and disbursed, i.e. less than 10 per month on average. However, as from the beginning of September 1980, the program suddenly started to expand and 3 months later, the number of loans disbursed had more than doubled to over 600. Table 1 traces the quantitative performance from then on. At the official end of the S.S.E.P. under CUDP II, a total of 3,495 loans had been disbursed for a total of Rs 8.869 million. This represented 72.8% of the target number of loans but only 29.6Z of the total targeted loan amount. Moreover, it had taken five instead of three years to achieve these mixed results. hat Happened in the First Four Years? 2.08 It became clear early on that both CMDA and the participating banks had at best a half-hearted commitment to the program. CMDA senior staff appeared to be ill at ease with or disinterested in a program that was both small as far as CMDA's budget was concerned and outside their technical expertise and thie mainstream of CMDA's activities. Accordingly, staff assigned to the program was below needs and appointed after considerable delays; it was not until late in 1981, i.e., when the initially agreed program should have reached its goals, that a competent, higher level officer was appointed to head the S.S.E.P.. Through these early years, staff morale was low and turnover high. 2.09 As for the commercial banks, they had shown interest in the program initially because they expected World Bank funds would flow to them for this activity. When GOI decided that only the commercial banks' own resources should be used for this purpose, their main reason for joining hands with CMDA disappeared. Also, it remains unclear whether GOI ever issued the directive to the banks called for by the project agreement. Certainly, the managers and staff of the participating commercial banks in Calcutta were unaware of such a directive. Last but not least, the banks had been asked to give priority to rural credit for so long that they were slow to hone in on the credit needs of urban slum dwellers. 2.10 The other participating institutions did no better. KBPS dropped out before the program started because of internal squabbles among the member organizations. CSSI never appointed more than six officers to the program, out of the 20 plus 1 senior officer that were foreseen initially. By November 1981, only four of these six were still involved in the S.S.E.P. At that time, the total staff available to the program was about as follows: 11 social workers, also called "planning assistants*, from CMDA; -8- 3 full-time and 2 part-time bank officerst 4 extension officers from CSSI. 2.11 Even though the staff commitment was well below p;anned levels, considerably greater achievements could have been obtained with these resources (see below for experience since 1982), were it not for operational problems. First and foremost, the S.S.E.P. adopted an operating procedure that turned out to be clumsy and ineffective. Five field units were set up, consisting of one person each from a bank and CSSI and two CHDA planning assistants. These were to operate as teams with the result that if any one of the team members did not show up, the team would not go on field work. This could only have worked with strict performance targets and controls for each team member, but these were not set up. Even when, by chance rather than as a matter of course, all team members were present, lack of transport and the distance of the headquartert of the S.S.E.P. in Salt Lake City from the target slums made the operation difficult and highly inefficient. 2.12 The program was also beset by a number of other operational problems, for example: (a) extremely slow processing of applications by the banks once they were screened by the field units, long delays in disbursements of approved loans3/ and high numbers of rejections, often after the loan application had been screened by the field units; (b) lack of flexibility of the banks and CSSI in adjusting collateral and registration requirements to the capacities and needs of the target entrepreneurs; (c) lack of familiarity of CDA and CSSI staff with banking practices; (d) a misguided attempt by CMDA to impose its own loan appraisal forms on participating banks. 2.13 These problems were repeatedly identified and solutions proposed during successive Bank supervision missions. While progress was finally achieved on all of them, it took much longer than it might have because the Coordinating Committee did not fulfill its functions. The committee, which was to meet every two months, was basically convened only at the request of or on the occasion of Bank supervision missions. Agreements reached in these meetings were rarely implemented and there was no consistent follow- up. Neither the Bank nor CMDA had any leverage on the commercial banks and the commercial banks in turn could point to the shortcomings of CMDA's own commitment and performance. Indeed, CMDA did not deliver what was most prized by the bankst identification of borrowers and help in loan instalment collections. 3/ For example, by January 1980, 1,000 loan applications had been received, but only 150 had been forwarded to the banks and a paltry 30 had been disbursed. -9- 2.14 The first significant expansion in the loan scheme occured outside these procedures when the Bank of Baroda joined the scheme in early September 1980. Bank of Baroda already had a significant portfolio of small loans to enterprises similar to the S.S.E.P. target group and joined the program in the hope of attracting other business from CMDA. It carried out the program through a specialized "multi-service branch,, specifically charged with promoting such small loans. This branch had developed procedures whereby a team of bank officers would move into a given slum area on a pre-arranged and advertised date, when borrowers could be interviewed, screened and their projects appraised. Quite often, the approved borrower would walk out of the meeting with the money in his pocket. Loan collections would be done monthly or weekly at the place of business. 2.15 Three months after joining the S.S.E.P., Bank of Baroda accounted for over half of all loans disbursed since the inception of the program 2 1/2 years earlier. Less than a year later, its share in the total number of disbursed loans had risen to over 70% and its share of disbursed amounts approached 802. During this period, Bank of Baroda accounted for 407 of the 448 loans that were added to the portfolio of the S.S.E.P., i.e., for over 90%. The S.S.E.P. was turning into a *Bank of Baroda Programs. At the same time, this bank reported a significantly better arrears position than the five other banks with their more traditional and conservative approach. 2.16 Bank of Baroda continued to be the star performer through 1982, when it added about 1,000 loans to the S.S.E.P. portfolio. By the end of that year, it still accounted for about 65% of all loans made since the inception of the S.S.E.P. and would have accounted for more than 75% of all loans, if three new commercial banks had not joined the program during that year. Even during the remainder of the CUDP II period up to the end of March 1983, Bank of Baroda continued to do comparatively well. However, it accounted for less than half of the portfolio additions and its share of the total portfolio was down to 61Z in numbers and 562 in Rupee amounts. the S.S.E.P. was no longer a 'Bank of Baroda Program'; the Bank was beginning to be affected by problems that would significantly impact on its performance. 2.17 Two of these problems have general significance for the scheme. The first is that the initially highly praised method of running the S.S.E.P. through a specially designated branch turned out to have serious shortcomings. These were of three typess (a) supervision, repayment collection and general follow-up on loans is difficult and costly if the borrowers do not live in proximity of the branch that administers the loans; (b) the Reserve Bank of India was reluctant to authorize the creation of additional special service branches of this type, which constrains the scope for increasing the S.S.E.P. in the banks using this method; -10- (c) transfer of the branch manager can have a severe impact an the size and quality of the programt this actually happened in the Bank of Baroda in late 1982. The same effect occurs in other methods of operation but it is mitigated if large numbers of branches are active in the program. 2.18 The second problem for Bank of Baroda was that, like the other banks, it had been making loans under the S.S.E.P. almost exclusively under the Differential Rate of Interest (DRI) scheme. This scheme directs all commercial banks to lend a minimum of 12 of their total loan amounts to the economically weaker section of the population at a 4Z rate of interest. Since at that time funds cost the banks anywhere between 6 and 11% per annum, they had no incentive to exceed the 1% in the DRI scheme. Bank of Baroda was very near this level early in 1982 and was planning to slow down its lending activities under the S.S.E.P.. While the appraisal and subsequent discussions on the S.S.E.P. had foreseen lending at 10 to 12%, the banks uniformly preferred to lend under DRI, partly because most of them were generally well below the 12 target and partly because these loans were guaranteed for 90? of their value by the guarantee scheme of the Reserve Bank of India. Other small-scale lending was guaranteed only for 752 of the loan amounts.4/ Because DRI loans were then, in principle at least, limited to Rs 5,000 apiece, this bank preference for DRI lending was the single most powerful reason explaining why the percentage of achievement of the lending target in Rupees was so much lower than the achievement in numbers of loans. III. The Transition to and Experience under CUDP III until 1987188 The Growth Spurt in 1982 to 1984 and its Lessons 3.01 Between 1981 and 1982, the average monthly number of loans disbursed more than tripled and this number again rose significantly in 1983 and early 1984. The participation of the Bank of Baroda was certainly one reason for this growth but several other factors were also important, The first half of this period coincided with the preparation of CUD? III, in which an attempt was made to take account of the lessons of the S.S.E.P. under CUDP II and was characterized by the changes in procedures and approach introduced by the highly motivated project coordinator in charge of the S.S.E.P. since late 1981. This appointment itself reflected the growing recognition of the importance of the S.S.E.P. among the highest levels of CMDA management. CUDP III started on April 1, 1983. 3.02 One key lesson from previous experience was that CHDA needed to offer the ba--s something more than exhortations and help in borrower identification and loan collection. Bank of Baroda had joined the scheme in hope of attracting deposits and other banking business from CMDA. The suggestion to use deposits deliberately as a tool to promote the S.S.E.P. was first made early in 1982. It proved to be a powerful tool to secure the cooperation of branch managers in the program. Branch managers almost universally get deposit growth targets from their regional offices and their performance on this score receives great attention. Thanks to the 4/ The DRI guarantee was lowered to 751 as of March 1984. .11- cooperation of CMDA's top management, the S.S.E.P. began using deposit policy pragmatically to Oreward' successfully cooperating branch managers with very encouraging results. 3.03 The branch managers clearly emerged as pivotal in the S.S.E.P.. They have varying degrees of freedom in approving small loans on their own, but most can approve loans of the size common in the S.S.E.P. without reference to their regional offices. S.S.E.P. management accordingly spent a significant share of its time identifying interested branch managers and encouraging them to take part in the program. In addition to the deposit *carrot*, the S.S.E.P. also became much more effective in helping with borrower identification and follow-up, thus alleviating the universal complaint of branch managers about staff shortages.5/ It is worth noting that the expansion of the program up to the end of March of 1984 has been achieved with only two more CDA field staff than were in place in 1981. However, CMDA staff constraints were again coming to the forefront. A log- jam of willing branch managers and hundreds of applications had built up because the program had become more widely known and popular. A number of municipal councils were also asking for the program to become active in their jurisdictions.61 If expectations were disappointed by long delays, the program ran the risk of a serious setback, so that increases in CMDA staff had become critical to the future of the S.S.E.P.. 3.04 A key factor in achieving higher efficiency in borrower identification etc. was the progressive involvement of voluntary organizations, clubs and local authorities. The S.S.E.P. deliberately sought out such organizations and, provided they were registered (which requires elected leadership), briefed them about the program and encouraged them to identify and pre-screen potential borrowers. With the help of CMDA staff, the projects were then appraised and loan application forms filled in. Once loans were approved by the bank and disbursed, local organizations also took an interest in the repayments. In a few cases, loan collection itself was reportedly contracted out to them for a 2Z collection fee. Some Program Changes Under CDUP III 3.05 From CUDP 11 experience, it was also clear that the program could not rely almost exclusively on DRI loans. Not only could the 1t limit become a constraint eventually,Z/ but there was a large group of small 5/ These appeared to be more apparent than real since no branch, with the exception of the special branch of the Bank of Baroda, had yet built up an S.S.E.P. portfolio that would require even one full-time officer with clerical help for its administration. 6/ Institutional cooperation between the S.S.E.P. and a local authority had been confined to Baranagar municipality as a test case. The results were encouraging. Between January 83 and March 84, 446 loans were made and a large number of applications were awaiting processing. Bxpanding CMDA's cooperation with the municipalities was a key objective of CUDP III as a whole. 7/ This concern was largely discounted by the commercial banks. -12- entrepreneurs that did not qualify under the DRI urban income ceiling (yearly family income not exceeding Rs 3,000) but were still poor and had no access to institutional finance. Accordingly, the S.S.E.P. set out, under CUDP III, to encourage banks to lend to three SSE groups: - Category A - yearly income of up to Rs 3,000; loans at the DRI rate of 42; - Category B - yearly income of Rs 3,001 to Rs 7,200; initial interest rate at 12.52; ex-post rebate to about 82; - Category C - yearly income in excess of Rs 7,200; interest rate of 12.52. 3.06 The novel feature introduced under CUDP III was the ex-post interest rate subsidy of 4 1/4% to those borrowers in Category B that serviced their loans promptly. The objective here was to provide an incentive to these borrowers to acquire the discipline needed to become regular clients of commercial banks. The subsidy was to be paid to first- time borrowers that completed their repayments on time; repeater loans would bear the going commercial rate, then 12.52 per annum. The system provided for the smooth graduation of successful enterprises from the highly subsidized DRI rate to commercial rates. CHDA would administer the subsidy and the Bank would disburse against these expenditures. 3.07 This interest rate subsidy system was identified and proposed by World Bank staff during preparation of CUDP III and replaced an initial proposal by the government of West Bengal that had a similar objective. That proposal would have created a special credit program for Category B borrowers, to be administered by either CHDA or CSSI. In the end, GOVB agreed that the interest rate subsidy would accomplish the key objective of the proposal without its drawbacks. In particular, the commercial banks could not see the scheme as an encroachment on their turf, and it did not require creating a new financial institution. 3.08 This system helped to further allay the initial fears of commercial banks that substantial defaults might take place in the program. CUDP II experience had already gone a long way in this direction; participating banks reported in mid-1982 that bad and doubtful debts represented only 2% of loans made under the S.S.E.P., and that they were confident of recovering a major portion of these debts. For the established and traditional commercial customers of the banks, the default rate was reported to be near 152. It must be noted, however, that commercial banks appear to apply a rather generous yardstick to declare a loan in default; this may be after accumulated arrears of as long a three years. In mid-81, for example, ad-hoc statistics on 481 loans showed that 20.92 of the accounts due were in arrears for unspecified periods. Unfortunately, statistics on arrears and their aging were not being collected regularly for S.S.E.P. loans, a gap that was partly filled later (see below). In the meantime, given the youth of most of the S.S.E.P. loans, the *default rate' could at best be taken as an initial pointer. 3.09 In addition to these factors pulling the commercial banks towards more active involvement in the S.S.E.P., the benks were being pushed in the -13- same direction by GOI. A directive of the Reserve Bank of India obliged the commercial banks to lend 40X of their available funds to priority sectors; this was a higher percen:tage than previously. This target was to be reached by March 1985 and has remained in effect since. A complex set of sub-targets within the overall 402 target is also in effect. Many banks had to scramble to reach the target; in May 1984, Allahabad Bank, at the time the only one of the participating banks that was headquartered in Calcutta, actually banned any lending other than for priority sectors. S.S.E.P. lending falls squarely into the priority categories. 3.10 Last but by no means least, many middle and upper level bank managers in Calcutta feel that the commercial banks have an important social responsibility, and they support the S.S.E.P. for this reason. In some cases, branch managers have taken it upon themselves to join the program without encouragement from their regional offices. In other cases, regional or head office managers have openly supported the program. There is no doubt that such an expression of support from the newly appointed Chairman and Managing Director of Allahabad Bank ('Bankers to the People of Calcutta') was one major reason why 12 branches of the Bank accounted for 362 of all S.S.E.P. loans made in the first year of CUDP III and 402 of the amounts disbursed. Participating branches of this bank had managed to disburse only 111 loans in the previous 5 years of CUDP II. Quantitative Achievements Under CUDP III 3.11 The highly positive impact indicators from CUDP II (see below) provided strong encouragement for continued development and expansion of the S.S.E.P. Consequently, targets set for the program at the appraisal of CUDP III were greatly expanded from their level in CUDP II. Over the 5-year project period, the scheme was to make 42,600 loans, nearly 9 times the CUDP II target and more than 12 times CUDP II's actual achievement. Loans were expected notionally to average Re 2,000, 5,000 and 8,000 for categories A, B and C respectively, for an overall average of close to Rs 5,000. This implied a total disbursement of Rs 211.7 million, nearly 7 times the target and 24 times the actual achievement under CUDP II. By all accounts, this was highly ambitious. 3.12 The bottom part of Table 1 details actual achievements. With well over 32,000 loans and over Rs 145 million disbursed, achievements reached 76.52 of the target number of loans and 68.7% of the targeted loan amounts during the five years initially set for CUDP III implementation. Aveage loan size remained about 102 below the notional target figure. These are very substantial achievements. As Table 1 shows, annual progress was, however, very uneven, and it is instructive to reflect on why this happened. 3.13 At the end of the first year, it was clear the program was not expanding from the last year of CUDP II and was indeed operating at a lower level. While first year achievements were substantial in themselves, they accounted for only 5.52 of the target number of loans and 4.82 of the target amounts. At that juncture, as was explained above, the critical importance of increasing CHDA staff for the S.S.E.P. had already become clear, as had the concurrent need for a sustained CMDA staff training effort. In parallel, the need for increasing bank motivation through -14- systematic use of CMDA's and possibly the municipalities' deposits in favor of the high performers in the S.S.E.P. among the bank branches had also become apparent. Beyond this, a number of other strategic actions were identified during a seminar organized late in 1983, which was specifically designed to address the problems likely to impede the growth of the program. These weres (a) the program should deliberately select beneficiaries for whom credit was the only problem and who were likely to produce income and employment for themselves and others. The highly positive impact of the S.S.E.P. under CUDP II was achieved without technical assistance or training of target entrepreneurs and the size of the target group was thought to make it safe to ignore the more complex and costly technical support measures for the time being;8/ (b) targets should be agreed for the number of loans to be given by each bank and its participating branches as well as for the staff involved in the program. These should be complemented by a consistent measurement and control system keyed to program objectives, so that all actors in the program would feel responsible for achieving the program goals; (c) loan approval and administration procedures should be reanalyzed and streamlined using common approaches as much as possible. Cost consciousnes among the banks was not developed as much as desirable and cost increases could block progress of the scheme if not held to a minimum. 3.14 Some action was taken on most of these issues, but staff changes in the S.S.E.P. and in CMDA management have made it difficult to trace cause and effect in relation to the flat performance of the scheme during the first two and a half years and the sudden acceleration after that. We are thus reduced to speculate. The facts are as followss (a) the program continued to stay away from providing technical assistance and confined itself to providing loans, but no directive was issued that borrowers needing credit only should be selected; (b) CMDA created six zonal offices starting in 1984, with the operating base of each located within their respective zone of the CMD; the leadership quality and drive of the officers in charge of these zones has emerged as very important for the success of the scheme; 8/ There is also evidence that *new' technologies spread rapidly and without official intervention in an urban environment like Calcutta. This has reportedly happened with knitting machines, which do not even cater to a local market. -15- (c) a State Level Banking Comittee (SLBC) started meeting regularly sometime in 1985 to discuss the various "social" lending schemes, among which the S.S.R.P. The committee, in which CMDA is a full member, acts as a trouble shooter and generally fulfills the functions that were initially intended for the "Coordinating Committee" set up under CUDP II (see above); (d) Annual targeting for the S.S.E.P. was introduced, though the exact date remains unclear. CMDA management sets targets, which the S.S.E.P. coordinator allocates by zone according to populatio. and "lending potential" as identified by CMDA's Planning Department. S.S.E.P. zonal officers then divide the target by municipality and by cooperating bank branch. Bank branches get targets from their head office, often decided by size and staffing of the branch and in consultation with branch mangers. District Committees are also involved in target-setting for all social lending schemes; (e) deposit policy continues to be used in an ad-hoc and pragmatic but not systematic manner. CMDA offered positive action in the matter but made it quite clear in a first meeting of a "Task Force on the S.S.E.P.0 held in September 1985, that "deposit of the CMDA's funds could never be a precondition for participation of a bank in the program'. Some municipalities are also using their deposits to encourage bank branches that cooperate well, but have not been encouraged by CMDA to do so systematically; (f) CMDA staff working for the S.S.E.P. was increased in two steps in 1985186 and 1986187 from 13 staff plus the coordinator in 1984 to an establishment of 91 staff plus the coordinator in 1986/87. CSSI staff working for the S.S.E.P. has remained at three. Within the CMDA staff establisment, 31 vacancies exist for program assistants, mostly because it proved difficult to attract motivated staff into a program perceived as temporary. Not only was there recurrent talk the program might be removed from CMDA to another organization, even within CMDA its existence wab prolonged to 1990/91 only recently, with its future beyond that date still uncertain. No further staff increase is planned; CMDA feels that with the expected labor-saving through computerization, the present staff establishment will be adequate for the forseeable future; (g) the S.S.E.P. has run a total of 8 staff training courses, consisting of induction, orientation and refresher courses for all levels of its staff. Some seminars for officials and non- officials from municipalities were also conducted; (h) no particular effort was made to streamline loan approval procedures and attendant paper requirements, although banks decided formally in the above-mentioned task force meeting not to insist on 'margin money', i.e., a participation by the borrower with own funds in the "investment project" to be financed. This -16- was important but affects only a minority of loans since most of them appear to be given for working capital purposes. Also, banks do not insist on a co-guarantor for loans of up to Rs 10,000. 3.15 For measures other than the staff increases and staff training and renewed vigorous CMDA top management sapport since mid-1985, it is not clear how important or effective these actions or non-actions have been. One might speculate that the flat performance of the scheme from 1983/84 to the first half of 1985/86 (monthly loan approvals from October 85 to March 86 averaged less than 180) was due not only to staff constraints (including reportedly some sensitive problems with staff in place) but also to the time required to adapt to the reorganization of the S.S.E.P. into a zonal structure. Targeting may have contributed to the surge starting in the second half of 1985/86, but partial evidence suggests targets are not always realistic and there is no particular pressure to reach them nor are performance standards clearly applied to S.S.E.P. staff. Deposit policy, although it remains unsystematic, continues to be a positive factor not only by stimulating branch performance but also by bringing new banks into the program. The chance of attracting CMDA deposits seems to have been the major reason why, for example, two Calcutta-based banks joined the scheme and have become major players, i.e., the United Commercial Bank and United Bank of India. 3.16 Finally, continuing with the rather cumbersome loan processing procedures (on which more below) has not prevented the growth of the program nor has the cost of the program to the banks attracted any significant attention. Bankers complain about the complex.1ty of "social lending programs" taken together, but their cost-consciousness remains so underdeveloped, none of the banks has even attempted to calculate the costs of all these programs taken together, let alone the cost of the S.S.E.P. in particular. All we can say at the moment is that CMDA'S total five-year cost of the S.S.E.P. amounts to about 4.8% of the total disbursed amounts. 3.17 The fact remains that the program, after a flat 2/1/2 years to start with, has made such strides, it is now within one year of reaching or exceeding the initial CUDP III targets, a fact that puts this component's performance ahead of all the other components of CUDP III, except the health component, which also has an excellent record. Before moving on to examine the program's impact and problems, we shall briefly address three other features of program performance. 3.18 First is a look at the composition of loans by the three categories of borrowers that were distinguished at appraisal. The information is available until the end of February of 1988, i.e., for 59 months and gives the following picture: -17- Category No. of Total Rs per Re per loan loans amount loan notional Rs000 target A 10,073 24,400 2,422 2,000 B 16,679 75,800 4,545 5,000 C 4,257 40,300 9,467 8,000 Total 31,009 140,500 4,531 5,000 The overall average of the actual being within 1O of the notional target, the outcome is remarkably close to expectations. 3.19 Second, category B covers the borrowers that were to get the ex- post interest rebate if they had serviced their loans on time. Rs 6 million were earmarked for this purpose. At end-March 1988, only Re 100,000 had been spent, reportedly benefiting in excess of 1,000 borrowers. This suggests that e.ven if all present B borrowers eventually qualify for the rebate, the budgeted amount is far in excess of needs. Moreover, the eligibility limit for DRI loans at 42, previously set at an annual income of is 3000 in urban areas (which corresponds to the above category A), was raised late in 1986 to an annual income of Rs 7200, thus covering both categories A and B above. This further restricts the applicability of the interest rebate. The rebate itself is judged very positively by the participating banks. Accordingly, CMDA is planning to adjust the categories of borrowers, subject to concurrence by the Bank. Category A would cover annual incomes up to Rs 7200, category B those with incomes of Re 7,201 to Rs 12,000 and category C those above Rs 12,000. Whether the resulting equity problem between existing and new borrowers will require special action remains to be seen. 3.20 Third, the program is basically carried by six of 20 participating banks. These six accounted for 86% of the portfolio at the end of 1987. They had sanctioned between about 2000 and 9700 cases each. Another four banks accounted for a further 2,800 loans or 9.42 of the portfolio at the end of 1987. The performance of the first group of 6 and certainly that of these ten together will determine the arrears performance of the scheme as a whole, which is examined below. IV. Impact Assessment 4.01 Under CUDP II, impact monitoring of the S.S.E.P. remained very partial. The situation has improved somewhat under CUDP III, both qualitatively and quantitatively, although still falls short of what is needed to come to very firm conclusions. Because the data differ in some significant respects, we will examine them separately. Employment Growth Under CUDP 11 4.02 The impact monitoring system planned under CUDP II was not fully implemented but a significant amount of information has become available. Some of the information generated is incomplete in important respects, -18- difficult to interpret and hard to compare. But all the evidence points to employment generation and income enhancement at levels well in excess of even the most optimistic expectations one could have held at the inception of the scheme. 4.03 Table 2 records the employment increases that occurred in 631 units that benefited from S.S.E.P. loans under CUDP II. Tailors are singled out because of their numerical importance in the sample (50% of all cases)9/ and because they are atypical by the high rate of employment generation and low cost per added job, which essentially consists of no more than the price of a sewing machine. Total employment in all the assisted enterprises rose by 459, i.e., 62%. Over half the increase is due to newly formed tailoring units. Employment growth is lower in trade and services and in other manufacturing and repairs but still significant. The average loan amount per added job in manufacturing and repairs (excluding tailoring) comes to less than Rs 4,800; this compares to Rs 60,000 per job in small-scale industries supported by the CSSI in Calcuttalol at the time of CUDP II. Income Enhancement Under CUDP II 4.04 Income inceases of loan recipients subsequent to receiving the loan are recorded for the same units in Table 3. Tailoring units again stand out as atypical. The baseline income before the loan stands at an average of only slightly more than Re 57 per month; this is because a substantial number of new units is included in the total. Their baseline income was entered as nil, which cannot have reflected the real situation. 4.05 Recorded income increases in tailoring exceed 200%, approach 50? in other manufacturing and repair units and exceed 20% in trade and other services. Three things must be noted. First, since the information was combined from several surveys carried out at different dates, we cannot adjust the data for inflation. Secondly, the incomes listed are after repayment of loan instalments. Thus, in all cases where the loan was used 9/ Aggressive marketing of sewing machines by the manufacturers had something to do with this high percentage. However, the proportion of tailors among borrowers has fallen significantly under CUDP III, although this may be changing again (see below). 10/ For 481 borrowers statistics are available of the capital employed in these enterprises at the time they obtained the loan. Total loan amounts of Re 914,000 exceeded their own investment of Re 824,000 by about 11%. However, for tailors, loan amounts of Re 205,000 compared to own investment of less than Rs 5,000. In other manufacturing and repairs, loans were 112? of own investment and in trade and services 67%. -19- to buy equipment, the amount of income generated and "saved* in the form of loan repayment is not counted, nor is the amount of interest paid, which is part of the value added by the borrowing enterprises. Thirdly, the difference between manufacturing/repairs other than tailoring and trade/services narrows if the income increases are related to average loan amounts as listed in Table 2. Income increases after loan servicing amount to 180.9Z of the average loan amount in tailoring, 67.6% in manufacturing and repairs and 452 in tradelservices. 4.06 The incomes generated by the employment increases shown in Table 2 that do not reflect working owners of new enterprises should be added to this impact. Unfortunately, the data on additional employment do not distinguish between new working owners and others; from other data, it appears that creation of new enterprises was highly concentrated in tailoring and very low in other activities. This explains the extraordinary income increases in tailoring, since previous earnings of the new entrepreneurs were not taken into account.11/ Also, the survey did not collect information on wages received by additional workers other than owners, either before they were hired or in their new job. Finally, it was not established how much of the additional employment went to paid or unpaid family members; in both cases, their *earnings" would be reflected in Table 3 already, since that Table is based on family incomes from the unit. We can, however, treat the above rates as a lower limit. 4.07 We can also establish an upper limit, for activities other than tailoring, by factoring in the earnings of additional employees at the going rate for unskilled labor. In 1984, this was the same as at appraisal in 1976, Rs 8 per day. On that basis (25 working days per month) annual incomes of owners and workers together would have risen by 117.3% of the loan amount in manufacturing/repairs and by 82.9% in trade/services. The true figures certainly lie somewhere in between, but even if they are close to the minimu given above, the rates of return are still very high. 4.08 The appraisal expectations that some of the additional income accruing to loan recipients would result from replacing high cost money lender funds has also been realized. Unfortunately, systematic statistics on the matter have not been prepared. We do have some information on the income redistribution effect of loans in cases where they were used to buy equipment items previously rented. Equipment rental is particularly wide- spread in tailoring and rickshaw pulling. Rickshaw pulling is probably the clearest case for income redistribution since there is unlikely to be any systematic change in gross income just because a rented rickshaw is replaced by one owned by the puller.12/ ill The 315 tailoring units that received loans employed a total of 90 people before receiving the loans. Thus, at least 225 and probably more *new* tailoring units were financed. From casual information, it is likely that many of these new owners were previously active in the same trade as out-workers with rented machines. 12/ This effect can occur in tailoring if the purchased machine is more efficient than the, often older, rented model. -20- 4.09 Hand rickshaws cost about Rs 1,500 in 1984, the rental fee was reported to be Re 3.5 to Ra 4 per day, and gross income of a puller about Re 13 to Re 15 per day. Using averAges for these ranges, net income of the puller with the rented rickshaw would have been Re 10.25 per day or Rs 256.25 for 25 workin3 days. Repayment of a rickshaw loan was generally pitched by the banks at Rs 2 per day for a total maturity approximating 3 !iars. On that basis, net disposable income for the puller owning his rickshaw came to Rs 300 per month, an increase of 17.12, entirely due to income redistribution. The increase rises to 36.6% once the loan is paid off. Program-wide, the part of income redistribution in total income increases is highly unlikely to have been as high as this; even if it were, this would still leave substantial net returns for the program as a whole. 4.10 For a small sample of 20 loan recipients, information was also available on how the extra income was spent. The sample covers borrowers whose average income was Re 550 per month before the loan and rose by 33.62 to Rs 735 per month. Thus, the sample comprises enterprises that were not among the poorest. Their food consumption increased by 25.62 and absorbed close to 60? of the additional income; non-food consumption rose by 62.5? and absorbed the remainder, which suggests significant stimulation of the urban economy. As before, there may in addition have been savings if the loan was used to buy durable assets. Employment Growth Under CUDP III 4.11 Under CUDP III, the S.S.E.P. has started gathering income and employment data systematically for all borrowers on the occasion of the latest visit by S.S.E.P. staff. Reportedly, basic data are now available for close to 10,000 borrowers, but only the data for 2,000 have so far been computerized by CMDA. Table 4 presents the employment data for those cases, which cover mostly borrowers from the early years of CUDP III. The data differ from those under CUDP II in that all working owners were counted as employed before the loan. This affects in particular tailoring enterprises; under CUDP II this was not done in the same manner. 4.12 The first point of note is that the percentage of tailors in this sample is well below that of CUDP II. It is reported, however, that in the later years of CUDP III, the percentage of tailors among newly sanctioned loans has risen again and may recently have been as high as 40? to 50?. The explanation is that Calcutta has emerged as a major supply center for ladies' garments, drawing buyers from as far away as Punjab. As a result, the clothing industry in Calcutta is booming. 4.13 Employment increases in tailoring shown by Table 4 lead the field with nearly 57?; this is much lower than in Table 2, but the CUDP II data are very flawed, as explained above. CUDP III increases of 301 to 33Z in the other two categories are slightly higher than under CUDP II, but this cannot be explained without more detailed knowledge of the sub-sectoral composition of the twj samples. In any case, some 1,200 new jobs were created with these 2000 loans, which should lay to rest the widespread pre- conception that micro-enterprise loans have negligible employment effects. On the assumption that this sample of 2,000 cases is representative of the portfolio as a whole, the S.S.E.P. has so far increased employment by about 19,500, no mean achievement. -21- 4.14 Loan amounts per added job have increased between CUDP II and CUDP III, most dramatically for tailoring. While inflation must have played a part in this, other factors have contributed. For one thing, CUDP II loans were overwhelmingly in the DRI category, i.e., the sma-lest loans. As shown in the text table above, this reliance on DRI loans has greatly abated under CUDP III. For another, we don't know to what extent CUDP III loans have been used to buy different types of equipment from that bought under CUDP 11 and, in the services category, whether CUDP III loans have been devoted more than under CUDP 11 to diversifying the range of cosmodities traded or services offered. Casual observation from field visits suggests that diversification into new and more expensive lines of goods, such as cosmetics, plays an important role in trading activities of borrowars. Income Enhancement Under CUDP III 4.15 Table 5 presents income data for the same 2,000 borrowers. These differ in some important respects from those gathered under CUDP II. First, 'incomes after loan' are shown before making loan service payments; CUDP II income data were reported on a net basis, i.e., after deducting loan service payments. Second, CUDP III data are said to be net of cash payments to additional helpers, even if they are family members. This was not so clear in the CUDP 11 data. Other queries concerning the data remain the same as for CUDP II. In both cases, it is unclear how reliable the data are, in particular for incomes before the loan. Borrowers may be tempted to understate their income in order to qualify for lower interest payments either under category A or category B. But the opposite may also happen since ability to repay the loan is an important consideration in the loan approval process. The impact of these conflicting incentives is unknown. 4.16 With these comments in mind, data in Table 5 suggest a highly favorable income impact of the S.S.E.P. loans, with average increases of more than 82% over incomes before the loans. And, compared to the average loan amounts, annual income increases average 76Z. These increases, although reported on a gross basis, exceed those recorded on a net basis for CUD? II by a very substantial margin, except for tailoring where data are just not comparable at all. As was the case in the employment discussion, we would need to know much more about the sub-sectoral composition of the borrowers' activities before attempting an interpretation. Also, as for the CUDP 11 figures, control group information is not available so we don't know how non-borrowers' incomes have developed by comparison. 4.17 Comparison of Tables 3 and 5 reveals some other peculiarities that call for investigation. One is that income of tailoring units after the loan under CUDP II are significantly lower than incomes before loans under CUDP III. This would suggest that non-borrowers may have done better than CUDP II borrowers, were it not for the possibility that CUDP III loans may have helped an initially more prosperous group of perhaps larger units, a possibility reinforced by the average employment per unit recorded in Tables 2 and 4 (1.21 in CUDP II and 2.54 in CUDP III, both after loan). The opposite phenomenon may explain why income before loans in "other -22- manufacturing and repairs' was lower in CUDP III than in CUDP II, because average employment in CUDP III borrowers was also lower, i.e., 2.59 and 2.07 respectively, before loans. No such difference exists for trade and other services, where average incomes before loans were virtually identical in the CUDP 11 and III samples and average employment per unit differed only slightly. 4.18 Regretfully, some other statistics one would like to have for more complete impact analysis are still not being collected. Foremost among these is information on the wages paid to the people that obtain jobs. Casual field visit information suggests cash wages are sometimes paid monthly, particularly in trading and service activities, and they may range from Rs 100 to about Rs 200 supplemented by food and, sometimes, shelter. Many of the manufacturing activities pay piece rates, which appear to be pitched at a level that adds up to about Rs 10 per 8-hour day for the average worker. Other information suggests casual unskilled labor can earn RS 12 to Rs 15 per day epending on the physical demands of the work. More systematic data would certainly help. Additionally, statistics breaking down loans by purpose and by maturity would also help. And some more comprehensive statistics on how much of the income increase may be due to replacement of money lender funds, rented equipment or supplier credits, would also be desirable. From casual field trip information, we know that supplier credits can carry interest payments at annualized rates of 90% to 150%, and the CUD? II analysis made earlier suggested rates for money lender funds and rental equipment. This is not systematic enough to estimate the proportion of income increases due to displacement of these high-cost financing sources. Also, there is no information on the proportion of repeater loans, if any, in the portfolio. And, finally, it would be interesting if data could be generated as the savings and expenditure patterns for the additional income, so that the social and economic impact of the loans could be assessed more comprehensively. V. Some Problems 5.01 Two general areas require attention, i.e., the arrears position and procedural issues. As for the arrears position, information on CUDP II experience was limited to an ad-hoc investigation of 481 loans in 1981 which revealed arrears of about 21%, almost all of which the banks considered recoverable in time. CUDP III has now instituted more systematic reporting on the overall amount of arrears though not on their aging, and Table 6 presents the resulting data by zone and for five of the major participating Banks. By Novtmber 1986, the arrears position had worsened to 30% of amounts due. Within this average, the zones show some variation, with Calcutta and South zones having the best record, i.e., 21% in arrears. The January 1988 data show an overall improvement to 26% in arrears, covering very different zonal developments, but reflecting some conscious effort by the S.S.E.P. and its participating banks to address the situation. The Hoogly and Central zones showed significant improvements, compensated in part by deterioration in the North and Honrah zones. 5.02 Among the highly variable arrears position of the five main banks for which information is available, Bank of Baroda continues to stand out, just as in CUDP II, as the one with the best recovery position, in excess of 90?. This good performance is generally attributed to the Bank's method -23- of collection, which is done by visiting the borrowers at their place of business at payment time. Although the Bank has dissolved its 'multi- service branch* in charge of S.S.E.P. loans under CUDP II (see above), it continues this method of operation though *multi-service cells established in its branches. All other banks rely in principle on borrowers to bring the payments to the Bank. United Bank of India has improved its arrears position from 462 in November 86, the worst of the five banks, to 302 in January 1988, in large part by departing from this principle and visiting the borrowers in arrears at their place of business. Allahabad Bank also improved its arrears position from 332 in November 86 to 211 in January 1988. Apparently alone among the banks, it uses borrower visits both to collect arrears and to reschedule repayment plans, so that improvement in its arrears position reflects in part a lengthening of maturities. State Bank o! India is the only Bank showing a significant deterioration in arrears from 302 to 412, perhaps because it shows below-average interest in the arrears. 5.03 Zonal performance and Bank performance interact with each other, mostly because branch networks of individual banks are unequally represented in the different zones and some of the zones have generally low and deteriorating arrears positions, e.g., North and particularly Howrah. Howrah is an example of a zone where all S.S.E.P. type loans have to be channelled through 'Borough Committees'. A decision of this type was taken by the authorities in both the Calcutta and the Howrah Corporation areas. Borough Committees being political bodies,131 this has exposed the program to some pressures for dubious loans, and the importance of servicing loans has not been stressed enough. Banks, pointing to the resulting bad arrears position, have become wary of sanctioning further loans in these areas. Reportedly, entrepreneurs seeking access to the program are now beginning to 'lobby" the various parties for improved program implementation. This may have to be complemented by an educational effort aimed at vard counselors and borrowers in arrears. 5.04 CMDA staff of the S.S.I.P. now focuses increasingly on the arrears question. A deterioration in arrears was effectively predicted early in CUDP III, if CMDA staff constraints were not lifted. This did not occur until 1985186 and the main focus then was on expanding the scheme more than on maintaining the quality of the portfolio. This is now changing. S.S.E.P. staff is involved in organizing regularly scheduled recovery drives, where staff from CMDA, the banks and the municipalities (or private sponsoring organizations) visit borrowers in arrears in a given neighborhood in an attempt to collect arrears. This is apparently quite successful. The S.S.E.P. staff has also lowered its quantitative target to 10,000 loans in 1988/89 from the 11,500 achieved in the year just ended, in order to free staff resources for follow-up action. CMDA also decided quite some time ago, at least in principle, to contract out loan collection to voluntary organizations for a 22 collection fee. This could be a significant stimulus to better loan collection but has yet to be implemented. Public sector banks are prohibited from doing this on their own. 131 The committees are chaired by an elected representative of the major party in the borough and composed of one counselor for each of the borough's wards. -24- 5.05 All this being said, the fact remains that the recovery rate under the S.S.E.P. is vastly superior to those in other leading programs of this type in India, some of which reportedly do not even teach double digit percentages, let alone half of the amounts due. Given that banks are obliged to devote a certain share of their resources to such 'priority* lending, this has made the S.S.E.P. comparatively very attractive to them. 5.06 On the procedural side, two matters still raise concern, i.e., the 6 months it takes on average to process a loan application from receipt to disbursement of approved loans and the percentage of loan applications that get rejected eventually, which reportedly falls between 502 and 60Z. Concern about processing delays has led the SLBC in a recent meeting to *direct* that these should be reduced to a more reasonable three to four months. Representatives of the banks maintain the delays occur in the time taken by municipalities to forward loan applications to them, and that the banks themselves take no more than four to six weeks. If true, it is the officials of municipalities that need to give higher priority to processing of the applications, but the SLBC has little if any leverage over them. Banks also consider an inspection visit on site of the borrower's business as mandatory, with the participation of a CMDA staff member and of the sponsor, either the municipal counselor or his authorized representative, or a representative of a voluntary agency. The purpose of the visit is to introduce the borrower and the bank to each other and to look at the location, the surroundings and the physical condition of the borrower's business promises. 5.07 As for the high rejection percentage of loan applications, the banks give lack of documentation as the main reason. GOI has stipulated that no borrower should have access to *duplicate financing" by obtaining loans from more than one social lending scheme. This is enforced by stamping the borrower's ration card. In addition, the borrowers have to produce proof of their identity and that they are running a bona fide business. This requires tax receipts if they own the premises and rent receipls if they don't, as well as a municipal trading license. If any of these papers cannot be produced, the loan is rejected. The solution to the problem might be to alert borrowers to these requirements before loan applications are formalized, thus reducing resources absorbed by preparing loan applications with no hope of approval. VI The Future of the S.S.E.P. 6.01 In line with the lengthening of CUDP III's implementation period, the continuation of the S.S.E.P. until 1990/91 has also been decided. Beyond that, CMDA is preparing a follow-up CUDP IV, of which the S.S.E.P. is expected to be an integral part, no matter who will finance that project. Preparations are not advanced far enough to present the future scope and directions of the program. 6.02 Replication of the scheme is reportedly also under serious consideration in the National Commission on Urbanization. If it were to be extended to other Indian cities, this might bring to the forefront again the issue of integrating micro-enterprise credit more systematically with infrastructure improvements, such as more work space, access to electricity or expanded retail markets. Calcutta officials feel that city is probably -25- better equipped in these areas than many others, but even there, casual discussions with borrowers suggested they could benefit substantially from such improvements. In recognition of this situation, CMDA is pursuing fuller integration of credit delivery and physical improvements in the preparation work for CUDP IV. 6.03 A for the involvement of the banks, this seems assured because of GOI's lending targets for priority sectors and the well-developed sense of social responsibility of the Calcutta banking community. Also, the program is now beginning to be seen as benefiting the banks. For one thing, its repayment performance compares very favorably with other programs of this type in India and thus reduces the cost of obligatory lending for priority sectors to the banks. For another, the program is beginning to produce some regular bank customers with established credit records and larger loans, although this is not yet happening on a large scale. Other payoffs are sometimes seen in the opening of savings accounts by borrowers which should, overtime, help the important objective of deposit generation. However, Reserve Bank of India rules on interest rate calculations make small transactions extremely costly and burdensome in the virtual absence of computerised account administration. The trade unions have now relaxed their initially total opposition to computerisation and this is taking place on a selective basis. But, for the moment, the banks' top priorities for computer use lie in areas other than administration of small accounts, such as wage and salary administration. 6.04 Finally, CMDA must be encouraged to beef up its monitoring of the S.S.E.P. through expanded use of computers. Micro-enterprise programs of the size now reached by the S.a.E.P. cannot hope to realize the potential maaement benefits from up-to-date monitoring information any other way. The ability to develop and analyze additional impact indicators (see end of Section IV above) and to do so with a high rate of portfolio coverage would be an additional benefit. Table 1 Calcutta Small-Scale Enterprise Credit Scheme Loan Disbursements Cumulative Disbursements Incremental Disbursements No. No. of Rs No. of No. of Rs per of Loans per Rs'000 per Loans Loans per R9'000 Loan Date Loans Month Loan Month CUDP II Nov. 28, 80 620 14.1 1,154.8 1,863 620 14.1 1,154.8 1,863 Nov. 15, 81 1,068 19.2 3,052.2 2,858 448 39.0 1,897.4 4,235 Dec. 31, 82 2,763 40.0 7,059.5 2,555 1,695 125.6 4,007.3 2,364 Mar. 31, 83 3,495 48.5 8,869.0 2,536 732 244.0 1,604.5 2,192 I CUDP III- Financial years: April 1 to March 31 1983/84 2,346 195.5 10,112.0 4,310 2,346 195.5 10,112.0 4,310 1984185 4,779 199.1 23,228.0 4,860 2,430 202.8 13,116.0 5,391 1985186 11,210 311.4 48,769.0 4,350 6,431 535.9 25,541.0 3,972 1986/87 21,108 439.8 90,"#4.0 4,301 9,898 824.8 42,025.0 4,246 1987188 32,580 543.0 145,383.0 4,462 11,472 956.0 54,589.0 4,758 Sources CMDA 0uP SI tables (5.2.88) Table 2 EMployment Impact of 631 Loans Under CUDP II Loans Employment Activity of No. of Total in Rs per Before After No. of Increase Loan hAmont Borrower Units Re*000 Unit Loan Loan Jobs I per added job Added in Rs Tailoring 315 260.4 827 (90) 382 (292) (324.4) (892) Other manufacturing and repairs 161 516.7 3,209 417 526 109 26.1 4.740 Trade and other services 155 341.6 2,204 232 290 58 25.0 5,890 I Total 631 1,118.7 1,773 (739) 1,198 (459) (62.1) (2,437) N.B.s All data in brackets affected by flawed data on employment in tailoring before loan. Sources CD @aP III %sbI (.3.81) Table 3 Income Increases Recorded for 631 Borrowers under CUDP II Activity of No of Average loan Average annual Average annual Income increases borrower Units amount Income income Z of I of income Rs before loan after loan Re loan before loan Rs R9 Tailoring 315 827 (690) 2,186 (1,496) (180.9) (216.8) Other manufacturing 161 3,209 4,368 6,536 2,168 67.6 49.6 and repairs Trade and other services 155 2.204 4,458 5,450 992 45.0 22.2 Total 631 1,773 (2,554) 4,097 (1,543) (87.0) (60.4) N.B.s All data in brackets affected by flawed data for income of tailoring units before loan. Sources CNDA aCM M-tabl** t"o. s.19.W) Table 4 Employment Impact of 2000 Loans under CUDP III Activity of No. of Loans Employemnt Increase Loan amount borrower Units Total in Average Before loan After loan in jobs per added job _ Rs'000 Rsunit No Z Rs Tailoring 320 828.8 2,590 518 813 295 56.9 2,809 Other manufacturing and repairs 420 2,150.0 5,119 869 1,159 290 33.4 7,414 Trade and other services 1,260 5,846.4 4,640 2,079 2,696 617 29.7 9,476 Total 2o000 8,825.2 4,413 3,466 4,668 1,202 34.7 7,342 Source: Calculated from data supplied by CMDA. CaP Z-table (rev. 8.19.86) Table 5 Income Increases Recorded for 2000 Borrowers under CUDP III Activity of No of Average loan Average annual Average annual Income increases borrower Units amount income income X of Z of income Ra before loan after loan Rs loan before loan Rs Rs Tailoring 320 2.590 2,712 6,696 3,984 153.8 146.9 Other manufacturing 420 5,119 3,888 7,140 3,252 63.2 83.6 and repairs Trade and other services i.M 4.640 4t488 7ig 3.228 69.6 71.9 Total 2.000 4.413 4.078 7,430 3,352 76.0 82.2 Source: Calculated from data supplied by CHDA. OWP It-tables (ree. 8.ie.88) -31- Table 6 Loan Recovery Rates by Geographical Zone and by Major Bank Nov. 1986 Jan. 1988 Change in X points Zone Hoogly 66 78 +12 Central 62 72 +10 North 62 57 -5 Calcutta) 79 85 n.a. South ) 73 n.a. Howrah 62 50 -12 Major Participating Banks Allahabad Bank 67 79 +12 United Bank of India 54 70 +16 Bank of Baroda 94 91 -3 State Bank of India 70 59 -11 Bank of India 64 69 +5 Total Portfolio 70 74 +4 Sources CMDA ASIA REGION DISCUSSION PAPER SERIES 1 IDP2 The Labor Force Participation of Women in the Republic of. Korea: Evolution and Policy Issues C. Grootaert Nay 1987 F. Iqbal IDP15 The Role of Exchange Rate Policy in Four East Asian Countries Sang-Woo Nam May 1988 D. Leipziger 78841 IDP28 The Small-Scale Enterprise Credit Program (S.S.E.P.) Under the Second and Third Calcutta Urban Development Projects (CUDP II and CUDP III) - An Assessment F. Kahnert March 1988 F. Kahnert 76376 1/ Extra copies may be obtained from the Asia Information Service Center.