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WDP-58 Public Disclosure Authorized WorldBank Discussion Papers Making the Poor Public Disclosure Authorized Creditworthy A Case Study of the Integrated Rural Development Program in India Public Disclosure Authorized Robert V Pulley Public Disclosure Authorized RECENTWORLD BANK DISCUSSIONPAPERS No. 1. PublicEnterprises in Sub-SaharanAfrica. John R. Nellis No. 2. RaisingSchool Quality in DevelopingCountries: What InvestmentsBoost Learning? Bruce Fuller No. 3. A Systemfor Evaluatingthe Performanceof Government-InvestedEnterprises in the Republicof Korea. YoungC. Park No. 4. CountryCommitment to DevelopmentProjects. Richard Heaver and ArturoIsrael No. 5. PublicExpenditure in LatinAmerica: Effectson Poverty.Guy P. Pfeffermann No. 6. CommunityParticipation in DevelopmentProjects: The WorldBank Experience.Samuel Paul No. 7. InternationalFinancial Flows to Brazilsince the Late 1960s: An Analysisof Debt Expansion and PaymentsProblems. Paulo Nogueira Batista, Jr. No. 8. 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AgriculturalTrade Protectionism in Japan: A Survey. DelbertA. Fitchett No. 29. MultisectorFramework for Analysisof Stabilizationand StructuralAdjustment Policies: The Case of Morocco. Abel M. Mateusand others No. 30. Improvingthe Qualityof Textbooksin China. BarbaraW. Searleand MichaelMertaugh with AnthonyRead and Philipcohen (Continuedon the insideback cover.) 5,8- ~ World Bank Discussion Papers Making the Poor Creditworthy A Case Study of the Integrated Rural Development Program in India Robert V Pulley The World Bank Washington, D.C. Copyright C 1989 The World Bank 1818 H Street, N.W Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printingJuly 1989 Discussion Papers are not formal publications of the World Bank. They present preliminary and unpolished results of country analysis or research that is circulated to encourage discussion and comment; citation and the use ofsuch a paper should take account of its provisional character. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitation of its boundaries or its national affiliation. Because of the informality and to present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Department, at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated. The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions; it is of value principally to libraries and institutional purchasers. The latest edition is available free of charge from Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W, Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Iena, 75116 Paris, France. Robert V. Pulley is at present an economist in Country Department I of the World Bank's Europe, Middle East, and North Africa Regional Office; he was with the India Department of the Asia Regional Office when this paper was written. Library ofCongress Cataloging-in-Publication Data Pulley, Robert V., 1959- Making the poor creditworthy : a case study of the Integrated Rural Development Program in India / Robert V. Pulley. p. cm. -- (Wcrld Bank discussion papers ; 58) Bibliography: p. ISBN 0-8213-1267-7 1. Integrated Rural Development Programme (India) 2. Credit- -India. 3. Poor--India. I. Title. II. Series. HG3729.I42P86 1989 332.2--dc2O 89-16413 CIP EXECUTIVE SUMMARY India's Integrated Rural Development Program (IRDP) is among the world's most ambitious efforts at credit-based poverty alleviation. The IRDP was initiated a decade ago and has reached 27 million poor households through commercial banks which provide finance for investment in income generating assets. Credit is matched by capital subsidies of 33-50Z on household investment. Government spent Rs 4.7 bln on such subsidies in 1987-88, an amount which may increase in future years. The program has increased the asset holdings of about one quarter of all rural households in India. This paper examines the impact of the IRDP and the long-term viability of credit-led approaches to poverty alleviation. Success is assessed against the program's objectives includingproductivity of investments,real income gain by households, and credit repayment. Drawing on new data from the first panel survey of beneficiariesover a four-year period, the analysis identifieshousehold characteristics,program features, and economic conditions that contribute to success. The paper also examines the extent to which the IRDP's structuralobjective of assuring that the poor have continuing access to institutionalcredit and banking services -- a goal of Indian credit policy since the early 1950s, is being achieved. The paper shows that providing some poor households with capital to invest in income generating assets can be an effective means of raising their incomes. Nevertheless,even where beneficiarieshave succeeded in self-employmentand repaid credit according to schedule, the program has not led to their continued access to banking services. With the interest rate on IRDP fixed by government at a rate below the banks' costs and interest rates on all priority lending in rural areas held below market clearing levels, banks choose not to lend additional funds after their obligation to achieve IRDP targets is satisfied.Although the high rates of interest and recovery observed in informal credit markets indicate that poor borrowers do pay for credit at a rate which covers costs, informal markets do not cater to the demand for long term investment capital. Honeylendersare unwilling to accept such risk except in exchange for long term labor contracts (i.e., bonded labor) to assure repayment, a condition prohibited by law. The paper points out that gains in productivityof investment and credit recovery can be made by altering certain delivery features of IRDP, but argues that the existing structureof incentives facing banks and borrowers are responsiblefor critical shortcomings. Low interest rates and large capital subsidies, although attractive to the poor in the short- term, are found not to be in their long-term interest since they distort investment scale and choice, preferencesfor self-employment,encourage misappropriation,and cause banks to limit their future lending to such clients. These facts together with the general environmentof financial indisciplinewhich