中国和印度地下金融

Imperfect Substitutes:The Local Political Economy of Informal Finance and Micro?nance

in Rural China and India

KELLEE S.TSAI*

Johns Hopkins University,Baltimore,MD,USA

Summary.—Banking authorities in both China and India have attempted to limit most forms of

informal?nance by regulating them,banning them,and allowing certain types of micro?nance

institutions.The latter policy aims to increase the availability of credit to low-income entrepreneurs

and eliminate their reliance on usurious?nancing.Nonetheless,the intended clients of micro?nance

continue to draw on informal?nance in both rural China and India.This article argues that the

persistence of informal?nance may be traced to four complementary reasons––the limited supply

of formal credit,limits in state capacity to implement its policies,the political and economic

segmentation of local markets,and the institutional weaknesses of many micro?nance programs.

ó2004Elsevier Ltd.All rights reserved.

Key words—Asia,China,India,informal?nance,micro?nance,rural?nance

‘‘[O]?cial reports of the moneylender’s impending de-mise are much exaggerated.’’––Clive Bell on India (1990).

‘‘The fact that these private or underground credit money houses exist and sometimes thrive in the coun-tryside even today has revealed that farmers need them.’’––People’s Daily on China(November29, 2002).

1.INTRODUCTION Developmental economists have long noted the complexity of providing e?ective rural credit delivery in large,agrarian countries such as India and China.1Establishing and main-taining a network of rural?nancial institutions is expensive,and managing their operations is di?cult in the absence of proper training, monitoring,and incentive structures.The operational challenges of rural?nancial inter-mediation are compounded by state develop-ment strategies that promote industrialization and urbanization at the expense of agricultural production.At the macrolevel,the notorious scissors gap between agriculture and industry redistributes savings from rural to urban areas, thereby limiting the relative supply of rural credit.At the microlevel,this means that even well-located rural households that have the option of keeping their savings in o?cial ?nancial institutions may lack access to formal sector credit and rely instead on a wide range of informal,curb market mechanisms.

It is in this context that governments throughout the developing world have regarded informal?nance as a negative re?ection of de?ciencies in the formal?nancial system.In both China and India,the traditional image of the usurious moneylender adds an additional pejorative dimension to the o?cial depiction of World Development Vol.32,No.9,pp.1487–1507,2004

ó2004Elsevier Ltd.All rights reserved

Printed in Great Britain

0305-750X/$-see front

matter doi:10.1016/j.worlddev.2004.06.001

*Earlier versions of this paper were presented at the

Workshop on Local Governance in India and China:

Rural Development and Social Change,Kolkata,Jan-

uary6–8,2003,and the Duke University Comparative

Politics Workshop,February24,2003.The paper bene-

?ted greatly from the constructive input of the workshop

participants.I am also grateful for the insights of

Richard Baum,Anirudh Krishna,Laura Locker,Eddie

Malesky,Mark Selden,Suman Sureshbabu,Sarah

Tsien,Fei-ling Wang,Steven Wilkinson,David Zweig,

and four anonymous reviewers.They are,of course,

absolved from the article’s inadequacies.Financial sup-

port from the Ford Foundation Public Policy Grant

Competition is gratefully acknowledged.Final revision

accepted:10May2004.

1487

informal?nance:when the poor lack access to conventional sources of credit,they are exploited by loan sharks and other illegal curb market operators.Following this logic,the prescription thus requires increasing state e?orts to eliminate informal?nance,while enhancing the availability of state-sanctioned ?nancial intermediaries,especially micro?nance programs devoted to poverty alleviation.Even with these policy measures,however,small business owners and farmers continue to rely primarily on curb market?nance in both China and India.Moreover,in some cases,the scale of informal?nance actually increases in commu-nities that have been targeted for a greater supply of o?cial credit.This raises the question of why o?cial attempts at limiting informal ?nance and expanding the accessibility of for-mal?nance may have such unintended conse-quences.One basic reason for the persistence of informal?nance is that the supply of formal ?nance is limited and insu?cient to meet the demand for credit.A second explanation is that o?cial state policies are not being implemented properly.In addition to these economic and state-centric explanations,this article argues that informal?nance and formal?nance are imperfect substitutes for two additional,com-plementary reasons:First,because credit mar-kets are segmented by local political and social dynamics;and second,because government-sanctioned micro?nance programs are often structured in a manner that fails to serve its intended clientele.This suggests that informal ?nance is not simply a manifestation of weak-nesses in the formal?nancial system,but also,a product of local political,institutional,and market interactions.The analytical value in recognizing these local interactions lies in their ability to explain why developmental outcomes deviate from state intentions.

The article proceeds as follows:Section2 reviews the key expressions of formal and semi-formal?nance in China and India,and shows how the countries’strategies in rural?nancial intermediation compare with one another. Both have relied on directed credit and encouraged the growth of micro?nance pro-grams,albeit to di?ering degrees.Section3 outlines the main expressions of informal ?nance in China and India and discusses the extent to which they have been subject to state regulation.Section4delineates four comple-mentary explanations for why state e?orts to substitute informal?nance with micro?nance have not been successful,and presents two local case studies from India and China,respectively, to illustrate how the combination of credit supply,local political economic conditions,and institutional characteristics of?nancial inter-mediaries mediates the dynamics of rural ?nance.

2.FINANCING RURAL DEVELOPMENT

IN CHINA AND INDIA

To understand the formal institutional con-text against which curb market activities have ?ourished,this section highlights major chan-ges in the basic structure of rural?nance.Both countries have established credit cooperatives, commercial banks,and poverty alleviation mi-cro?nance programs in rural areas,but these formal sector institutions have not displaced informal and semi-formal sources of credit.2

(a)Formal?nancial sector

After India’s independence in1947and the establishment of the People’s Republic of China in1949,the1950s represented a rela-tively optimistic and ambitious phase for both countries in establishing a national system for agricultural?nance.Both newly inaugurated regimes shared the developmental goals of promoting growth without exploitation,and creating grassroots-level savings and credit institutions to serve farmers.

Although India inherited a basic network of credit cooperatives from the colonial era,the Reserve Bank of India’s(RBI)?rst decennial All-India Debt and Investment Survey in1951 found that93%of rural households relied on informal?nance(Bouman et al.,1989,pp.12–14).This?nding inspired a strong political commitment to establishing formal sector alternatives to the curb,which was popularly viewed as being exploitative and even‘‘evil’’(RBI,1954).Hence,throughout the1950s and 1960s,the government actively promoted the expansion of cooperatives‘‘to provide a posi-tive institutional alternative to the moneylender himself,something which will compete with him,remove him from the forefront,and put him in his place(RBI,1954,pp.481–482)––or more generally,to enhance the availability of agricultural credit and alleviate rural poverty. In the mid-1970s,India’s rural?nancial system went through another expansionary stage with the establishment of regional rural banks (RRBs)at the district level,farmers’service

WORLD DEVELOPMENT 1488

societies at the village level,and further growth of nonbanking?nance companies.3Even though the number of bank branches tripled during1969–79,the government considered rural access to be too low at37,000people per rural bank branch;therefore,in1980another seven commercial banks were nationalized to extend their outreach in rural areas(AFC, 1988,in Nagarajan&Meyer,2000,p.172).In quantitative terms,progress has been made on this latter objective:according to the RBI,by 1998India had a total of64,547RRB branches, which was equivalent to17,000–21,000rural citizens per bank branch.4But,the RRBs have proven to be?nancially unsustainable and ine?cient in loan delivery(Bhatt&Thorat, 2001).

Shortly after the founding of the People’s Republic of China,the Chinese communists ordered the closure of all forms of private ?nance and banned popular forms of curb market?nancing,including pawnbrokering and‘‘loan sharking’’(Hsiao,1971).During the 1950s,China also set up a network of rural credit cooperatives(RCCs),but unlike the cooperatives in India,China’s original RCCs acted mainly as?scal institutions that funneled credit between the state and the people’s com-munes rather than serving as commercial credit-granting institutions.It was not until the commencement of market-oriented reforms in the late1970s that RCCs started to function more as grassroots banking institutions that served rural households and collective enter-prises,and the Agricultural Bank of China (ABC)was re-established to handle larger scale commercial banking activities.5Meanwhile,in the early1980s,the Ministry of Agriculture established a network of Rural Cooperative Foundations(RCFs)to serve farmers,but the People’s Bank of China never considered them formal‘‘?nancial institutions’’and succeeded in shutting them down at the end of the1990s. Indeed,throughout the reform era central authorities have repeatedly waged national political campaigns to crackdown on the curb. In July1998,China’s State Council even issued formal‘‘Provisions on the Cancellation of Illegal Financial Institutions and Activities,’’which reiterated that illicit?nancial institutions should be banned(Xinhua,July22,1998,cited in Tsai,2002a,p.1).

The elimination of RCFs left about44,000 RCCs at the township level(with about280,000 village branches)as the only formally approved nonbanking?nancial institution devoted to serving rural enterprises and households.Since then,central banking authorities have deliber-ated over how to improve their performance (Watson,2003),and injected approximately US$4billion in recapitalization funds into the RCC system because RCCs are technically insolvent.As of mid-2003,RCCs accounted for 11.5%of total savings and10.8%of loans extended by formal?nancial institutions,and a pilot reform scheme for decentralizing their management was underway in eight provinces (PD,November30,2003).

(b)The rise of micro?nance

Given the inability of most formal sector banking institutions to reach rural populations and the popularity of informal sector alterna-tives,micro?nance programs have emerged as a potential solution for bridging the gap between the supply and demand for rural?nance.In both India and China,micro?nance has taken the form of subsidized loans in government-supported poverty alleviation(PA)programs, and various donor and nongovernmental organization(NGO)-lead endeavors.While the actual expressions and overall scale of micro-?nance di?ers in the two countries,the relative e?ectiveness of these two main forms of mi-cro?nance is similar.Speci?cally,subsidized microloans in government-supported PA pro-grams tend to have low repayment rates and tend not to reach the intended clientele;and micro?nance programs run by NGOs are more e?ective in reaching poor clients when loans are structured in a?nancially sustainable manner and use lending methodologies that are adapted to the particular economic needs of the inten-ded clients.

(i)Directed subsidized credit in public poverty alleviation programs

Extending subsidized loans to low-income areas and households has traditionally been the ?rst,and perhaps least e?ective strategy that governments use in their rural development strategies,and India and China are no excep-tions(Adams,Graham,&von Pischke,1984; cf.Morduch,2000).The Indian Integrated Rural Development Programme(IRDP)was established in1978with the mandate of extending microloans through the banking system to impoverished households and now regards itself as the‘‘world’s largest program for providing microloans to the poor(Sinha, 2000,p.66).’’In its?rst two decades,the IRDP

INFORMAL FINANCE AND MICROFINANCE1489

extended Rs.250billion(US$12.3billion) worth of subsidized loans to approximately55 million families who have an annual income of less than Rs.11,000(US$305).6Given that70 million families live below the poverty line in India,it is apparent that the IRDP has had signi?cant outreach.In addition to the loans, IRDP borrowers also receive a cash subsidy at the time of loan disbursal equivalent to25–50% of the project cost(Nagarajan&Meyer,2000, p.170).The program has certainly disbursed a high volume of loans,but funds have been misused via the subsidy component such that cash is diverted to local elites rather than the intended borrowers;as a result,the program has had a repayment rate of only25–33% (Sinha,2000,p.66).Meanwhile,the RRBs and primary agricultural credit societies have not performed any better.The RRBs have been saddled with soft loans to priority sectors,while primary cooperatives have served mainly as tools of political patronage.7Due to the non-commercial orientation of these programs, basically all of the formal sector institutions involved in micro?nance have depended on re?nancing and recapitalization by apex insti-tutions on a regular basis(Nagarajan&Meyer, 2000,pp.177–179).

State-subsidized micro?nance in China has had a shorter history than in India,mainly because China started poverty lending about one decade later than India.To be sure,both central and local governments in China have directed subsidized credit to particular sectors or industries,but that type of‘‘policy lending’’has not occurred in the name of micro?nance or poverty alleviation.8In1986,a subsidized lending scheme for poverty relief was intro-duced,which targeted collective enterprises at the township and village level rather than individual households(Rozelle,Park,Ren,& Bezinger,1998).While o?cial interest rates on loans ranged between8%and10%,the poverty alleviation loans charged only 2.88%annual interest.As is the case with most subsidized credit schemes,the loans were distributed to politically important enterprises and higher-income households,and the repayment rates were about50%(Park,1999).

Providing subsidized loans directly to households did not start until a few years into China’s National8–7Poverty Alleviation Plan, introduced in1993.As part of the strategy to raise80million people out of poverty in seven years(i.e.,during1994–2000),the central gov-ernment identi?ed592poor counties where households would be directly targeted for sub-sidized poverty loans.In quite a change from the previous mode of distributing subsidized credit to local enterprises,in1996many of the counties adopted the Grameen Bank model of group lending whereby groups of?ve borrow-ers would mutually guarantee the repayment of their respective microloans in multiple instal-ments(Bornstein,1997;Holcombe,1995; Khandker,Khalily,&Khan,1995).These loans ranged from1,000to2,000RMB (US$120–240)and they continued to be subsi-dized at the o?cial PA lending rate of2.88%. Once the decision was made to disburse PA loans directly to households in o?cially desig-nated impoverished counties,they were dis-bursed rapidly,almost quota style:

By August1998,o?cial microcredit schemes were operating in more than600counties in22provinces, with the largest programs(in Shaanxi and Yunnan) reaching over500,000households...In1999,with be-tween30and40million people still classi?ed as poor, the central government’s budget for the8–7Plan called for expenditures of Y24.8billion($3billion), of which Y15.3billion($1.84billion,or62%)was for loans funds(Conroy,2000,p.36).

By2000,the government had disbursed US$775million worth of subsidized microloans (Tsien,2001),and by2002nearly US$3.7 billion(or half)of the central governments poverty-relief funds were going toward pov-erty-relief loans(Xinhua,March2,2002).As in the earlier model of poverty lending,however, repayment rates in these government programs have been low,i.e.,less than60%.Even though the Agricultural Bank of China(a state com-mercial bank)took over the poverty lending program from the Agricultural Development Bank(a policy bank)in1998,the People’s Bank of China(PBC)has not been involved in monitoring the microcredit component of the Agricultural Bank of China’s operations,and the loans are treated more as social grants rather than as commercial loans.In other words,the microcredit component of PA lending has been treated as one-time?xes rather than exhibiting a commitment to sus-tainable models of micro?nance(Cheng,2003). Meanwhile,the PBC has been encouraging RCCs to extend microloans to rural house-holds.As of2002,the PBC reported that RCCs had extended a total of78.9billion RMB (US$9.54billion)worth of microloans and that 25%of all rural households in the country had received such loans(CIIC,November5,2002).

WORLD DEVELOPMENT 1490

Although RCCs report higher repayment rates than the PA programs,as of year-end2003, their ratio of nonperforming loans was still quite high at nearly30%(SIC,January14, 2004).

(ii)NGO and donor-managed micro?nance institutions

The involvement of NGOs in running mi-cro?nance institutions(MFIs)varies signi?-cantly in India versus China.This is due in part to di?erences in the policy environment for both NGOs and nonbanking?nancial institu-tions.While the government of India has pro-moted the growth of self-governing NGOs and encouraged domestic development?nance institutions to collaborate with them,China’s NGOs are sponsored by a particular govern-ment unit(making them government-organized NGOs rather than pure NGOs)or established by international donors.To date,India’s NGOs have had more extensive reach in mi-cro?nance than their counterparts in China, but in both countries,few MFIs are?nancially sustainable while the market for MFIs remains vast.

In India,micro?nance NGOs have generally taken one of the following three forms:self-help group(SHG)programs that have linkages with banks;cooperatives;or Grameen replica-tors(EDA Rural Systems,1996).Organized by NGOs,SHGs consist of10–12people with similar socioeconomic and demographic char-acteristics(e.g.,low-income women in rural areas).As of2002,there were one million SHGs with17million members(Ashe,2002, cited in Wilson,2002,p.221).The purpose of the SHGs is to help the members save small amounts of money on a regular basis,to create an internal insurance fund for members to draw on in times of emergencies,to empower the members through collective decision-making, and to extend uncollateralized loans to group members(Hannig&Katimbo-Mugwanya, 1999,p.7).Since1992,the National Bank for Agriculture and Rural Development(NA-BARD)has experimented with creating link-ages between SHGs and banks,such that banks lend through NGOs or directly to SHGs.As of March2003,over444banks were participating in micro?nance linkages with717,360SHGs;in total,the SHG–bank linkage program had served an estimated7.8million low-income households(NABARD,2002,2003).9Ulti-mately,NABARD hopes to reach one-third of India’s rural population through the establish-ment of one million bank-linked SHGs by 2008.(Bansal,2003,p.24).

Aside from participating in the SHG–bank linkage model,over500NGOs serve as?nan-cial intermediaries themselves by brokering funds between banks and low-income borrow-ers.There are also a handful of cooperatives such as SEWA Bank,the Indian Cooperative Network for Women,Tamil Nadu,and coop-erative credit societies associated with the Cooperative Development Foundation that are involved in micro?nance.Finally,about10 organizations may be considered Grameen re-plicators.The largest ones are SHARE,Activ-ists for Social Alternatives Trust,and Rural Development Organization,Manipur(Sinha, 2000,p.70).

Overall,MFIs in India have not been subject to stringent regulations,especially those that are not registered as cooperatives or nonbank-ing?nance companies.Given the developmen-tal contribution of MFIs,the RBI has not enforced Section45S of the RBI Act,which prohibits savings mobilization from the public without RBI permission.Furthermore,?nan-cial liberalization since the1990–91economic crisis has loosened interest rate controls on microcredit,which o?ers MFIs in India the space to structure their loans in a?nancially self-sustainable manner.Whether this occurs, however,depends in large part on changing popular perceptions that low-income borrowers cannot a?ord commercially viable interest rates.

In contrast to the relative ease with which NGOs may register themselves and act as MFIs in India,China’s policy environment is much more restrictive.All NGOs in China must have an o?cial government unit sponsor their application to register as‘‘social organizations’’with the Civil A?airs Bureau(Saich,2000).As such,China does not have purely nongovern-mental organizations engaged in micro?nance even though they may be functionally equiva-lent to NGOs.The introduction of the Gram-een model of micro?nance provides a good example of the close relationship between government entities and NGOs in China.

The replication of the Grameen model in China?rst came about through the individual initiative of researchers at the Rural Develop-ment Institute of the Chinese Academy of Social Sciences(CASS)and international donors;but to date,the most successful Grameen replications are managed from an o?ce housed at CASS.With funding from

INFORMAL FINANCE AND MICROFINANCE1491

Grameen Trust,the Ford Foundation,and the Canada Fund,in1994a small group of CASS researchers led by Professor Du Xiaoshan established the Funding the Poor Cooperative (FPC)in Yixian,Hebei(Tsai,2002a,pp.200–202).To implement the project they collabo-rated with the Yixian county-level Poverty Assistance Bureau and the Civil A?airs O?ce. As of March2003,there were three FPCs in Yixian,Yucheng(Henan),and Nanzhao(He-nan)counties,respectively,and together,the three FPCs had served a total of15,244bor-rowers(Du,2003).With repayment rates ranging from95%to99%,the FPCs are con-sidered the best examples of Grameen-style micro?nance in China.A central part of their success has been structuring the loans in a manner that covers their operational costs,i.e., at16%e?ective interest per annum.10Scaling up to extend their reach and experimenting with nonGrameen lending methodologies is their next challenge.11

Besides the FPC Grameen replications, international donors have initiated over200 micro?nance programs throughout central and western China(Cheng,2003,p.123).The donors have all implemented their projects with di?erent local governmental partners.For example,the AusAid project in Haidong, Qinghai that started in1996collaborates with the Agricultural Bank of China and the Qing-hai Commission of Foreign Trade and Eco-nomic Cooperation;the Heifer Project International has been collaborating with the Sichuan Animal Husbandry Bureau since1985; and since1995,the International Crane Foun-dation has implemented a Trickle-Up Program in Guizhou with the cooperation of the Guiz-hou provincial Environmental Protection Bureau.12With few exceptions,the donor-ini-tiated programs have been structured as pro-jects with a limited lifespan rather than as MFIs aiming for sustainability(Cheng,2003;IFAD, 2001,pp.20–21;Park&Ren,2001).Although this may be attributed in part to the o?cial interest rate ceilings on poverty loans,the FPCs have shown that it is possible to build in a higher,sustainable rate of interest in the Grameen model;and that rural borrowers are willing and able to pay those rates.Indeed,a study of NGO MFI clients found that the highest monthly interest rate that they would be willing to pay is32.6%.13This is consistent with the popularity of informal?nancing mechanisms(discussed below)that charge even higher interest rates.3.THE INFORMAL AND SEMI-FORMAL

FINANCIAL SECTOR

As suggested already,despite the substantial expansion of rural?nancial institutions in both countries over the last several decades,informal ?nance still represents a major source of credit for farmers and petty traders.In China,a study by IFAD estimates that farmers obtain four times more credit from the curb market than from formal?nancial institutions(IFAD,2001, p.C11),and another study of small business owners found that the curb accounted for up to three-quarters of private sector?nancing dur-ing the?rst two decades of reform(Tsai,2002a, pp.36–37).In India,the1992AIDIS survey revealed that nearly40%of rural households continue to rely on informal?nance––or more technically,‘‘noninstitutional credit agencies,’’which include agricultural moneylenders,pro-fessional moneylenders,traders,relatives and friends,and others.14Table1outlines the primary forms of informal and semi-formal ?nance in both countries and notes the extent to which they are sanctioned or prohibited.In both countries,private transactions involving high interest rates are in violation of banking regulations,as are organizations that mobilize savings without registering with the appropri-ate authorities.15Beyond those two restric-tions,however,the legal marginalization of curb market activity has not been consistently de?ned or enforced.In practice,curb market actors in both China and India have proven to be adaptable despite multiple rounds of disci-plinary action by?nancial regulators.

(a)Grey areas in China’s curb market?nancing In China,the extremes of legal versus illegal forms of?nancing are distinguished by whether or not they are sanctioned by the PBC,which hinges on whether they mobilize savings from the general public and o?er/charge interest rates above the repressed interest rate ceilings. Interpersonal lending and trade credit,for example,are among the most basic strategies that entrepreneurs use to deal with short-term liquidity requirements.Small business owners frequently borrow money from friends,rela-tives,and neighboring shopkeepers.Wholesal-ers may deliver goods to retailers on10-day or even30-day credit if they have an established relationship.Such practices are not illegal to the extent that they do not entail interest above the rates of state banks,16in contrast to those

WORLD DEVELOPMENT 1492

charged by loan sharks or private money houses.The latter are clearly illegal by PBC standards because they re?ect the higher mar-ket cost of capital in a?nancially repressed environment.Indeed,with the sole exception of Minsheng Bank,17private commercial banks are prohibited in China and the PBC has launched multiple‘‘?nancial recti?cation cam-paigns’’to shut down private money houses. Nonetheless,they have continued to operate underground,not only in the coastal south where private commerce is better developed, but also in northern central provinces such as Henan(Tsai,2002a,Chap.5).

Pawnshops straddle a?ner line between being legal and not quite legal and provide a good example of Beijing’s regulatory ambiva-lence in dealing with unconventional?nancing mechanisms.Their re-emergence during the reform era has been uneven and ambiguously regulated due to their usurious connotation.18 By1956private pawnshops were e?ectively eliminated,but after the?rst one opened up during the reform era in Chengdu in1987,they developed rapidly and by1993,there were 3,013documented pawnshops throughout the country.Most were operated by various bran-ches of government agencies,including state banks,policy departments,tax bureaus,cus-toms bureaus,and?nance and insurance com-panies(Li,2000),though some simply registered as ordinary private businesses with the Industrial and Commercial Management Bureau(ICMB).The o?cial interpretation of the‘‘new’’pawnshops was that they di?ered fundamentally from the traditional exploitative ones.As explained in a Ministry of Finance report,

It should be noted that today’s pawnshops in the country are not entirely what they used to be.Pawn-shops in old China took in personal e?ects at very low prices when the owners were poverty-stricken. However,such businesses today represent a medium

Table1.Legal condition of informal?nance in China and India

Type China India

Interpersonal lending––loans extended among friends,relatives,neigh-bors,or colleagues minjian jiedai––?nancial authorities do not

interfere with casual,interest-free lending

Interpersonal lending––?nancial

authorities do not interfere with

casual,interest-free lending

Trade credit––merchandise credit between wholesalers and retailers hangye xinyong––neither sanctioned nor

prohibited

Trade credit,forward sales

Moneylenders,loan

sharks––loans from profes-sional and nonprofessional money brokers,typically at high interest rates gaolidai––all high interest lending is illegal Mahajan and Chettiar bankers––

Some are registered as?nance com-

panies,trusts,banks,and partner-

ship?rms

Rotating savings and credit organizations(ROSCAs)––indigenously organized savings and credit groups huzhuhui,hehui,biaohui,chenghui,juhui––

permitted in localities where they have not

collapsed

Chit funds––registered as companies,

partnerships,and sole proprietor-

ships

Pawnshops––extend collat-eralized loans with interest diandang,dangpu––permitted when oper-

ated according to regulations

Pawnshops––legal if licensed

Indigenous banks,money houses,?nance companies––mobilize savings and extend collateralized loans siren qianzhuang,private money houses––

regarded as private banks,which are illegal;

most operate underground now

Deal with short-term credit(hundis)

combined with trade for?nancing

trade––committees have made e?orts

to formalize them

Rural cooperative founda-tions nongcun hezuo jijinhui––approved by MOA

until closure by PBC in1999

n.a.

Social organizations,mutual bene?t funds––registered entities that are supposed to serve lower-income populations

huzhuhui,hezuo chu jijinhui(mutual

assistance societies,cooperative savings

foundations)––registered with MCA,but

not supposed to engage in for-pro?t

?nancial intermediation

Nidhi companies,mutual bene?t

societies,permanent funds(mainly in

Tamil Nadu)––committees have rec-

ommended that they be regulated

more stringently

INFORMAL FINANCE AND MICROFINANCE1493

for normal commodity circulation...The new-born pawn brokering aims to serve the people and social production(Zhongguo yinhang,1993,pp.240–243). Despite this more favorable,revisionist evaluation of pawnshops,it became increas-ingly apparent that many were(illegally) mobilizing savings deposits from the public and o?ering high rates of interest.19As a result,in 1994the PBC was granted administrative authority over pawnshops and two years later, a PBC-lead crackdown on illicit?nancial institutions closed over half of the registered pawnshops,leaving only1,304shops with PBC licenses.20In a further attempt to circumscribe the?nancial malfeasance of pawnshops,they were reclassi?ed in2000from being‘‘?nancial institutions’’under the PBC’s authority,to‘‘a special kind of industrial and commercial enterprise’’regulated by the State Economic and Trade Commission(JJRB,2000).In short, over the course of the reform era,pawnshops have been legally registered in some cases, registered with the incorrect local agency in others,and engaged in practices that are clearly illegal.

While pawnshops are now technically sub-ject to central-level regulations,rotating sav-ings and credit associations(hui)remain unregulated in most localities.When hui involve relatively small groups of people(5–10 members on average)who pool set monthly contributions and rotate the disbursal of the collective pot of money to each member,local governments usually consider them a produc-tive form of mutual assistance among ordin-ary people,typically women.But if a member runs o?with the collective pot early in the life of an association,the members who have not had their turn in collecting money are cheated out of their contributions.In the coastal south,a handful of high-pro?le cases have accumulated where various types of hui were exposed as fraudulent schemes organized by con artists(Tsai,2000).The large-scale cases were not traditional ROSCAs,however,but rather,ponzi schemes that are never sustain-able because they generate extremely high returns by exponentially expanding the net-work of investors.Hui collapses make head-lines,but they are actually relatively rare.As such,it is only in a small handful of localities that hui have been banned by local govern-ments.

The ambiguous and shifting legal status of other curb market practices listed in Table1share the attribute of being legal according to certain governmental agencies,but not sanc-tioned by the PBC.The establishment of rural cooperative foundations(RCFs)by the Ministry of Agriculture in the mid-1980s exempli?es this phenomenon(Cheng,Findlay, &Watson,1998;Du,1998).As noted earlier, the PBC never recognized them as legitimate ‘‘?nancial institutions’’because another min-isterial bureaucracy created them.Nonethe-less,by the early1990s RCFs had been established in approximately one-third of all townships,and by1998there were over 18,000RCFs with over?ve million depositors (Holz,2001).Since RCFs were not permitted to mobilize deposits or extend loans like formal?nancial institutions,they used euphemistic terms for comparable transac-tions;instead of paying interest on deposits, for example,they sold‘‘shares’’(rugu)and extended‘‘capital use fees’’(zijin zhan fei-yong).Like pawnshops and other forms of informal?nance,RCFs had a variety of governance structures and were more central to rural?nance in some provinces than oth-ers(Park,Brandt,&Giles,2003).Their quasi-legal status proved to be short-lived, however.As part of broader national e?orts to rectify the?nancial system,in March 1999,the State Council announced the clo-sure of poorly performing RCFs,and the takeover of better performing RCFs by Rural Credit Cooperatives.These actions triggered farmers’protests in at least six provinces, including Sichuan,Hubei,Hunan,Henan, Guangxi,and Chongqing(AP,March22, 1999;AFP,March23,1999).Apart from RCFs,some de facto nongovernmental ?nancial institutions have managed to operate above ground and serve private businesses by registering as social organizations,which are administered by the Ministry of Civil A?airs. These go by a variety of names,including mutual assistance societies and cooperative savings foundations.The credit societies are supposed to be nonpro?t organizations that serve impoverished populations.In practice, however,they operate like RCFs or private money houses in the sense that they mobilize savings,extend credit to private entrepreneurs who may be well o?,and use interest rates that are higher than that set by the PBC. These types of social organizations should be distinguished from those that are genuinely oriented toward poverty alleviation via mi-cro?nance.

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(b)Attempts at mainstreaming India’s

informal sector

Relative to China,India has a longer history of state-directed credit for poverty alleviation, yet its formal?nancial sector is more liberalized and its informal?nancial sector,better docu-mented and more likely to take corporate forms than those of China.These apparent inconsis-tencies may be attributed to the fact that India’s?nancial policy environment has also ?uctuated considerably over the years.Post-independence governments in India have been concerned about the negative e?ects of infor-mal?nance on rural welfare and made repeated e?orts to regulate and create institutional alternatives to the curb.Indeed,what most observers would regard as informal?nancial intermediaries are registered under the Com-panies Act,1956or regulated by the RBI.For example,moneylenders acts at the state level regulate nonborrowing lenders,while borrow-ing lenders(or intermediaries)are also subject to various types of regulation.21Furthermore, the RBI has tracked informal?nancial activi-ties in o?cial statistics as a means to measure progress in expanding credit access into rural areas.(Table2lists the o?cial categories of informal?nance as de?ned by RBI and Figure 1shows their relative share of the curb market over time.)The extent of curb market regula-tion and tracking in India stands in contrast to the situation in China where many types of informal?nancing activities are simply banned. After taking into account sampling and nonsampling errors in the decennial surveys, the main trend is that informal credit has cer-tainly declined as a percentage of total debt, and both professional and agricultural money-lenders have reduced their share of the curb

Table2.Breakdown of informal?nance in rural India over time

Type of noninstitutional sources19511961197119811991 Landlords 3.5% 1.1%8.6% 4.0%n.a. Agricultural moneylenders25.247.023.18.6 6.3 Professional moneylenders46.413.813.88.39.4 Traders and commission agents 5.17.58.7 3.47.1 Relatives and friends11.5 5.813.89.0 6.7 Others 1.17.5 2.8 5.5 4.9 Unspeci?ed n.a.n.a.n.a.n.a. 3.8 Informal credit as share of total

household debt

92.8%82.7%70.8%38.8%39.6%a

Source:Reserve Bank of India,All-India Debt and Investment Survey,various years.

a1991?gures do not add up to39.6%even though Table5of the1991–92AIDIS report clearly states that non-institutional agencies account for39.6%of total rural household debt.

INFORMAL FINANCE AND MICROFINANCE1495

market over time.The decline of the money-lender in o?cial statistics re?ects in part state e?orts to register and regulate professional moneylenders during the1950s.Some went underground to avoid regulation and others were probably re-classi?ed as agricultural moneylenders or traders(Bell,1990).In this regard,note that the?rst three o?cial categories of informal lenders––landlords, agricultural moneylenders,and professional moneylenders––are not necessarily distinct from one another depending on the locality. But generally speaking,landlord lenders extend credit to tenants;agricultural moneylenders primarily deal with agricultural laborers and small farmers;and professional moneylenders service a wider range of customers and may register themselves as companies,partnerships, and trusts(Ghate et al.,1992,p.45).

Those in the fourth o?cial category of ‘‘traders and commission agents’’are also known as indigenous bankers.In contrast to professional moneylenders who lend their own money,indigenous bankers broker funds between banks and their clients,who tend to be traders rather than farmers(Schrader,1994). The Shro?s of Western India,for example, provide a short-term credit instrument called darshani hundi to traders who need to travel great distances to purchase inventory and transfer funds(Ghate et al.,1992,pp.198–200). In addition to serving as?nancial intermedi-aries,indigenous bankers are also business-people themselves.22Besides trading,they may operate commission agencies or hire-purchase ?nance(HPF)companies,which are basically leasing companies that?nance automobiles and other goods over a?xed term for clients who lack su?cient cash to purchase capital goods up front(Nayar,1992,pp.199–200).Even though formal sector HPFs exist,one study found that informal HPFs?nance a much higher volume of vehicles than o?cial auto ?nance corporations––probably because lower-income populations?nd the informal HPFs more accessible(Das-Gupta&Nayar Associ-ates,1989).

Forms of informal?nance in the other cate-gory also include indigenous bankers who are not registered as traders or commission agents; unregistered?nance corporations;nonprofes-sional moneylenders(other than those identi-?ed as friends and relatives);various types of leasing,investment,and housing?nance com-panies;ROSCAs(chit funds)and Nihdi socie-ties.Unlike the ROSCAs in China,which are completely informal,a number of chit funds in India are registered as companies,partnerships, and sole proprietorships under the All-India Chit Funds Act1982or the state acts(Ruth-erford&Arora,1997).The state’s rationale for regulating them is to increase the security of the members’contributions and to reduce the incidence of defaults.As such,organizers are required to have licenses and make security deposits with the Register of Chit Funds;the cost of collecting the pot(i.e.,the de facto interest rate)is capped at30%of the size of the pot;and chit funds are limited to a maximum of60months(Ghate et al.,1992,p.197).These regulations have not had their intended e?ect, however.Rather than increasing the stability of chit funds in general,many organizers have gone underground and taken their members (who seek higher returns)with them.

In addition to chit funds,Nidhi companies or mutual bene?t societies are also an important part of the nonbanking world of?nancial intermediation,especially in south India. Incorporated under the Companies Act1956, Nidhis mobilize savings from their members and extend loans that are collateralized with jewelry and real estate(Nayar,1992,pp.197–199).When nonmembers wish to make a deposit or borrow from a Nidhi,they take a share of the Nihdi.Over the years,the state has made repeated e?orts to regulate these mutual bene?t societies;and an Expert Group on Nihdis constituted by the Department of Company A?airs has recommended a host of additional regulations to professionalize their operations(PIB,2002).

4.THE PERSISTENCE OF INFORMAL

FINANCE

State authorities in both China and India have clearly recognized the importance of for-mal?nancial institutions in rural areas, including the expansion of micro?nance pro-grams for poverty alleviation purposes.Finan-cial regulators have also made repeated e?orts to eliminate and/or regulate of curb market activity.Why,then,has informal?nance per-sisted and even expanded in both countries? Four complementary explanations may be derived from the perspective of supply-leading economics,state–society relations,the local political economy of markets,and the institu-tional characteristics of lending programs.As will be shown,the?rst two hypotheses capture

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macrolevel dynamics,while the second two have explanatory leverage at lower levels of analysis.Speci?cally,the economic hypothesis concerns the gap between the overall supply and demand for formal credit,and the state–society hypothesis concerns limits in state capacity to reach the intended recipients of subsidized loans and microcredit.Both the local political economy and institutional design perspectives then explain why certain groups of people do or do not receive credit at the ground level.The rationale for each explanation is discussed in more detail below.

(a)Neoclassical economics:a matter of supply

and demand

Based on the logic of supply and demand in neo-classical economics,one reason that infor-mal?nance continues to play such an impor-tant role in rural China and India may simply be because the amount of credit demanded by rural households exceeds that supplied by the formal?nancial sector in rural areas.There-fore,to reduce the rural population’s reliance on the curb,o?cial sources of credit should be increased.This is known as the supply-leading approach to?nance and development(cf. Chandavarkar,1992;Patrick,1966).Table2 shows that according to o?cial statistics,the relative dominance of the curb market in rural India has declined over time with the expansion of formal credit institutions.Bell(1990)draws on two independent World Bank surveys to demonstrate,however,that the decennial RBI surveys underestimate the true scale of informal ?nance.This leads him to conclude:

[A]lthough the moneylender did lose ground relative to[formal?nancial]institutions over the period from 1951to1981,he remained a very important source of ?nance to rural households,and the expansion of aggregate debt was almost surely so great as to imply that his volume of business grew.

In other words,despite signi?cant increases in the supply of bank loans and microcredit (over US$15billion),rural households continue to draw on informal sources of credit.A more recent study of credit rationing in rural India con?rms that this is due to the combination of limited access to formal credit and continuing high demand for such credit(Swain,2002).

In rural China,the closure of RCFs elimi-nated an important source of semi-formal ?nancial intermediation,but we can still heu-ristically test the supply-leading hypothesis by considering the impact of the government’s large-scale poverty lending programs.Speci?-cally,if people were turning to informal?nance only because more institutionalized sources were unavailable to them,then ceteris paribus we would expect clients of micro?nance pro-grams to rely on subsidized poverty loans rather than high-interest loans from the curb.23Yet this turns out not to be the case.In their surveys of MFI clients,Park and Ren (2001)discovered,

[O]ver50%of households in program areas had out-standing loans from other sources,and that this per-centage was similar for both members and nonmembers.The most common source by amount was Rural Credit Cooperatives(55%for members, 46%for nonmembers),followed by informal sources. Thus it does not appear that micro?nance participants lack access to other credit sources,whether formal or informal(p.46).

Their study also found that the overall level of indebtedness is higher among micro?nance cli-ents,and that only one-quarter of them would have engaged in income-generating activities of the same scale in the absence of these loans. This suggests that although government-spon-sored microloans are not going only to rural households that lack access to formal credit,‘‘micro?nance lending relieves credit con-straints at the margin’’(Park&Ren,2001,p.

46).

Applying the supply-leading hypothesis to India and China explains in part the on-going popularity of informal?nance among rural households,but it also raises a number of questions.Why is business getting better for India’s moneylenders amid the expansion in formal sector institutions and MFIs?If MFI clients already have access to RCC loans,then why are they receiving MFI loans in the?rst place?Examining the issue from the perspective of state–society relations helps to explain this disjuncture between the intended and actual recipients of targeted and microcredit.

(b)State–society relations:a matter of state

capacity

A second reason why increasing the o?cial supply of credit has not translated into a matching decline in informal?nancial activity is because o?cial state policies are not being implemented properly.This may occur in three main ways:First,state actors may not be

INFORMAL FINANCE AND MICROFINANCE1497

distributing targeted credit properly due to insu?cient knowledge of how to identify the intended clients of subsidized credit and MFI programs.Second,state actors may intention-ally divert credit from the intended recipients. Third,nonstate actors may interfere with the proper disbursement of formal and MFI credit. Taken together,all three types of implementa-tion failure could be interpreted as re?ecting weaknesses in state capacity(Evans,Reusche-meyer,&Skocpol,1985).

The?rst type of implementation failure is rooted in the conditions under which formal credit is disbursed.In both India and China, conventional commercial banks do not have institutional experience in lending to rural cli-ents who lack an established credit history and collateral or guarantor.Therefore,the typical state response has been to require that national banks allocate a certain portion of their lending portfolios to lower-income rural households.Quota-style lending often does not achieve its substantive objectives,however, because the emphasis is placed on ensuring that a certain number of loans is disbursed, rather than on the identity and needs of the borrower.

When quota-style lending is accompanied by subsidized interest rates––which has been the case in both India and China’s PA loans––the prospects of reaching the intended clientele are further diminished.Instead of reaching lower-income households,subsidized loans usually end up in the hands of local elites who do not feel obligated to repay the loans(Adams et al., 1984).This common phenomenon relates to the second implementation failure,whereby state agents knowingly distribute credit to sectors of the population that are not necessarily excluded from the formal?nancial system.In India a number of government interventions in rural ?nance have been motivated by short-term political objectives that coincide with the elec-toral cycle.While China’s political context di?ers signi?cantly from India’s,targeted credit and PA loans are similarly subject to political patronage at the local https://www.wendangku.net/doc/977262566.html,pared with participants in the FPCs and mixed NGO-government programs,borrowers in the mi-crocredit projects run by local governments tend to be much wealthier and engaged in noncropping activities(Park&Ren,2001).The next section shows that the underlying reason for this second type of implementation failure is due to local market segmentation along politi-cal and social lines.

Aside from the top-down weaknesses in state capacity discussed above,nonstate actors may also be responsible for distortions in policy implementation(Migdal,Kohli,&Shue,1994). In this case,nonstate actors would include private economic actors such as?nancial entrepreneurs and politically important con-stituents of society.First,the argument could be made that the curb market thrives because informal?nanciers are determined to evade banking regulations.In other words,no matter how much formal credit is available in rural areas and no matter how stringent the penalties are for violating state laws,a certain strata of ?nancial entrepreneurs will always endeavor to subvert state policies.After all,informal ?nance persists even in advanced industrialized countries with sophisticated?nancial systems. The second main expression of noncompliance by societal actors may come from borrowers themselves.One could argue that lower-income farmers and rural traders boycott formal and semi-formal?nancial institutions to undermine their legitimacy(Selden&Perry,2000).Thus far,however,there is no evidence for this in India and China.Instead,it is more typically the privileged slice of the population that has interfered with the implementation of PA lending policies.In India,local politicians may extend subsidized credit to the upper tier of society,but after elections,loan recovery has also proven to be di?cult because‘‘the credit agencies’bureaucracy is reluctant to touch the in?uential rural elite who wield much formal and informal in?uence and considerable power’’(Yaron,Benjamin,&Piprek,1997,p.102). The low repayment rates in China’s subsidized PA programs suggest that similar dynamics are in operation.24

Analyzing the persistence of informal?nance through the state–society lens takes us one step closer to explaining why state?nancial policies have had unintended outcomes,i.e.,why state-subsidized credit and micro?nance have not gone to their intended recipients.But concep-tualizing the curb market as an inverse function of state weakness and societal strength su?ers similar problems as the supply-leading hypothesis.Just as increasing the supply of government-sanctioned credit does not auto-matically crowd out informal credit,strength-ening state capacities in rural?nancial intermediation does not necessarily come at the expense of nonstate actors such as money-lenders and wealthier households if local agents and institutions face competing political

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incentives.In both China and India,intrastate actors(such as local o?cials and bureaucrats charged with loan disbursal)are just as likely as nonstate actors to distort policy implementa-tion.

(c)Segmented markets:a matter of institutional

design and local political economy Ultimately,rural credit markets are more ?nely di?erentiated than a dichotomous trade-o?between state and society.Rather than assuming the perfect fungibility of credit (whether it be formal,semi-formal,or infor-mal),this explanation starts from the premise that credit markets are segmented even at the grassroots level.This means that no single type of credit can meet the needs of various potential borrowers,and no single type of credit is accessible to everyone(Ho?&Stiglitz,1990). The concept of segmented markets typically refers to the variation in preferences among consumers in di?erent economic strata,e.g.,in terms of loans for consumption versus pro-ductive purposes,and the conditions of credit access such as collateral,third party guaran-tees,and savings requirements.In other words, various forms of credit are not functionally equivalent to the borrower.Both the institu-tional design and lending methodology of di?er-ent forms of credit in?uence the relative attractiveness of,for example,government-subsidized loans versus unsubsidized micro?-nance loans from NGOs versus high-interest loans from the curb.All of them have di?erent restrictions in terms of loan size,amount, repayment terms,preferred clientele,etc. Hence,a borrower might take out a high-interest loan from a moneylender rather than a low-interest one from a government program because the former entails lower transaction costs or because the latter requires that the loan be used for productive purposes.

In addition to supply-side di?erences in the institutional types of rural credit,market seg-mentation also occurs along political and social lines,which further distorts the way local credit markets function in practice.Far from being a pure market where prices(interest rates)re?ect the relative supply and demand of di?erent types of?nancing,formal and semi-formal sector credit for PA purposes often faces state-mandated interest rate ceilings and is subsi-dized.That is to say,even during periods of credit scarcity,the cost of directed bank credit may be extremely low.By de?nition directed credit cannot go to the highest economic bid-der;instead,it is disbursed by credit o?cers. Moreover,as with any government-allocated good or resource,the distribution of subsidized credit and PA loans is political.Therefore, when PA loans do not reach the target popu-lation,more often than not,examining local political and social hierarchies may reveal where the soft loans were distributed. Similarly,the cost of accessing informal credit also varies depending on the structure of local political and social networks.Interest-free lending only occurs among tight knit groups of people,typically close friends or relatives. Members of ROSCAs usually know one another,or at a minimum,know the organizer or one other member.The higher rates of interest charged by professional moneylenders re?ect in part the higher level of risk associated with lending to clients with unconventional forms of collateral(if any).Even then,however, accessing most forms of informal?nance requires some form of introduction.Local curb markets are also segmented,though not always in expected ways.The following two cases from India and China illustrate more concretely how local social,political,and economic dynamics mediate the use of both formal and informal ?nance.25

(i)Tribal,caste,and occupational segmentation in a North Indian village

In a diachronic study of a South Rajasthan village that Jones(1994,Chap.18)calls Chan-drapur,we can compare the nature of the local credit market before and after a village bank was introduced.As of1989,Chandrapur Vil-lage had a population of over1,000people in 200households,within which were four main social groups engaged in di?erent economic activities:Hindu households engaged in caste-based nonagricultural activities,Jain house-holds prevailed in commercial and?nancial services,Jogis relied on income from working as migrants in Gujarat and Bombay,and the Bhil population lived in the hinterland.Before a village bank was introduced at the end of 1983,Chandrapur residents relied solely on informal sources of credit.The records of a Jain shopkeeper(called B.Jain)who provided pawnbrokering services revealed that even six years after the village bank was established,B. Jain’s lending volume had increased by over 100%in nominal terms––from Rs.53,351 (US$5,455)in1982–83to Rs.110,818 (US$6,756)in1988–89––and the annual

INFORMAL FINANCE AND MICROFINANCE1499

number of loans had increased from290to335, but the interest rate had remained at3%per month throughout the same period.26Mean-while,the total number of pawnshops in the village increased from15in1983to24in1989. Most remarkably,however,Jones found that the volume of loans extended by pawnbrokers vastly outstripped that of the village bank:

For Chandrapur,as a whole,a tentative estimate of pawnbroking loan volume is made by multiplying Rs.110,818(B.Jain’s loan volume)by the proportions of loan volume indicated by this shopkeeper for the other23lenders in the village.Adding the?gure to his own loan volume produces a total of Rs. 2,292,850for all24pawnbrokers in the village:?ve times the loan volume advanced by the bank during 1988–89.

A similar extrapolation from the335loans advanced by B.Jain,results in a total of6,799loans for all24 pawnbroking businesses:75times the number of loans advanced by the bank in1988–89,six years after it was established(Jones,1994,pp.18–24).

In addition to the expansion in pawnbro-kering,mutual?nance groups emerged during the same phase.By1991,50out of the200 households in the village were participating in these savings and credit groups,and by1992, the loan volume of mutual?nance groups was comparable to that of pawnshops and exceeded that of the village bank(Jones,1994,pp.18–8, 18–9).Why did a substantial expansion in curb market activities follow the introduction of the village bank?

Each of the explanations outlined above o?ers insight into the question.First,from an economic perspective,one could infer that the overall demand for credit in Chandrapur sim-ply increased dramatically over those years such that a single village bank could never have ful?led the demand.Indeed,during1988–89the village bank accounted for only90out of the total of425loans extended in the village(Jones, 1994,pp.18–23).27

Second,irrespective of credit supply,the vil-lage bank itself was poorly managed and failed to carry out its intended mandate.Speci?cally, the Chandrapur village bank was supposed to service a total of17di?erent villages,yet Chandrapur village residents alone received over half(54%)of its loans.Furthermore,even though the Bhil are Scheduled Tribe members and represent a speci?c target group of the bank,over half(52%)of these bank loans were extended to Jain borrowers who are relatively well o?.It is also worth noting that in1989,52%of the bank’s loan portfolio was in arrears, and30%was past due for over three years,i.e., in default.By way of contrast,during the same period70%of the loans extended by B.Jain’s pawnshop were repaid in full.

Third,the local credit market was highly segmented on both the supply and demand sides.On the supply side,the lending method-ology varied considerably among di?erent sources of credit.The village bank did not o?er the types of services demanded by certain groups in the community.In contrast,the popularity of pawnbrokering and mutual ?nance groups may be attributed to their?ex-ibility relative to restrictions associated with loans from the village bank.Villagers turned to the pawnshops to meet seasonal needs such as productive household consumption(e.g., housing construction,education,migration), agricultural cultivation,and ceremonial expen-ditures.At the other end of the income spec-trum,members of mutual?nance groups used them to engage in money lending rather than consumption or productive investment pur-poses.

At the same time,Chandrapur’s local credit market was also highly segmented along tribal and occupational lines.For example,the Jogis who are on the Scheduled Caste lists were supposed to receive targeted credit from the village bank,but due to their life cycle and consumption needs(e.g.,weddings and funer-als),they ended up relying on pawnbrokering loans from Jain shops.Meanwhile,only23%of the number of pawnbrokering loans extended by B.Jain went to local villagers,while75%of the loans went to Bhil customers who focused on agricultural cultivation in tribal settlements. By1989,Jain households themselves did not use the services of pawnshops because‘‘to take such a loan would involve loss of prestige with fellow Jains(Jones,1994,pp.18–27).’’Instead, Jains not only enjoyed privileged access to loans from the village bank,but also dominated the ownership of pawnbrokering businesses and accounted for one-third of the participants in mutual?nance groups,which were geared toward enhancing the volume of their informal lending activities.

In addition to intertribal and caste di?eren-tiation,informal credit markets are also seg-mented along occupational and gender lines. This is re?ected in the participation of savings and credit groups:of the126people partici-pating in mutual?nance,125are men;and the groups are organized by professional occupa-

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tion such that the Jains form the Government Employees’group,the Blacksmith Caste form the School Sta?group,and relatively few(8%) Bhil cultivators participate in mutual?nance. These multiple dimensions of segmentation help to explain why the scale of informal ?nance actually increased after the introduction of the village bank:not only did the village bank deviate from its mission,but ironically, the fact that most of the bank’s loans went to local curb market?nanciers(Jains)enabled them to expand the provision of informal ?nancial services to other groups in the village. (ii)Segmentation within a single surname village in South China

While it may seem intuitive that a multitribal village would have a segmented economic structure and therefore credit markets,the case of a single-surname village in the southern coastal province of Zhejiang shows that strong internal forms of di?erentiation are not uncommon even in a village where everyone could be considered a relative of some sort.Lin Village is comparable in size to Chandrapur Village,but unlike the latter it appears homogenous:95%of the households share the surname Lin and the village temple,which traces the Lin lineage back to the late Qing dynasty.28Despite this shared ancestry,access to various forms of credit is segmented along political,sectoral,and gender lines in Lin Vil-lage.

The political fault lines in the village are based on the three branches of Lins that orig-inally settled in the village.The?rst branch was very active during the Communist Revolution and ended up with the most Communist Party members.The third branch was the most prosperous one before the Revolution and was thus subjected to considerable political perse-cution throughout the Mao era.For example, during the Great Leap Forward,adult mem-bers of the wealthiest household were sent to re-education through labor(prison)camps and their spacious traditional courtyard home was turned into the communal mess hall.29The privileged position of the?rst branch has car-ried over into the reform era.Even though major decisions are supposed to be made by the democratically elected Village Committee, households from the?rst branch dominate village governance and the allocation of key resources,including access to land and credit. As such,members in the third branch have a di?cult time contracting land for their busi-nesses and accessing o?cial sources of credit. Although members of the second branch are neither politically privileged nor persecuted, they also have disadvantaged access to various production inputs relative to the?rst branch. It is important to point out,however,that the political hierarchies in Lin Village have not translated neatly into economic strati?cation. During the Mao era,the third branch certainly su?ered more than most,but in the reform era, the second and third branches have found ways to operate private businesses without going through o?cial channels.Given the paucity of arable land,30virtually every household in Lin Village operates a small factory.Interestingly,a member of the third Lin branch owns the largest of these factories with over30employ-ees––yet he has never borrowed from formal sources of credit.Owner Lin explained,

It’s not worth it to me to apply for a loan from a state bank or rural credit cooperative because the credit o?cers are dirty and rip me o?given my family back-ground.If I applied for a100,000RMB(US$12,000) loan,I would only receive60,000RMB(US$7,200) because the credit o?cer would pocket the other 40,000RMB(US$4,800).Meanwhile,I would still be expected to pay interest on100,000RMB. Owner Lin explained that households from the?rst Lin branch were more likely to borrow from state banks or RCCs because their rela-tives work https://www.wendangku.net/doc/977262566.html,cking such o?cial connec-tions,Owner Lin nonetheless managed to invest700,000RMB(US$84,000)in his motorcycle parts factory by using100,000 RMB(US$12,000)of his own savings,bor-rowing200,000RMB(US$24,000)interest free from his four older siblings,and borrowing 400,000RMB($48,000)at24%annual interest through moneylenders(yinbei).The latter loans were guaranteed by his sisters who have good credit among moneylenders in the textile sector. As of2001,Owner Lin still had the largest factory in town even though his family’s local political status remained low.

Before Owner Lin’s motorcycle parts factory was established in1998,there were larger col-lectively-owned factories in the village and each of them raised their funds in di?erent ways.For example,at the outset of reform,there was an iron factory,which relied mainly on RCC loans because it was run by managers from the?rst branch of https://www.wendangku.net/doc/977262566.html,ter on,in the early1980s, about25households in the second branch set up a plastics factory by pooling their savings for four years and registered it as a collective

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enterprise.This is called the‘‘wearing a red hat’’strategy because the plastics factory was really privately owned––registering it as a col-lective gave it preferential land use and tax treatment.Meanwhile,clusters of smaller household factories producing sugar,lime, paint,autoparts,and textiles tend to raise their start-up and working capital in sectorally dis-tinctive ways,except in cases where extended families are involved in more than one sector. Given the rapid industrial transformation of Lin Village in the?rst two decades of reform,it is unlikely that the local RCC and county-level Agricultural Bank could have kept up with the grassroots demand for investment and working capital.As such,the expansion in informal ?nancing during the reform era is not surpris-ing.It is noteworthy,however,that the busi-nesses that have received formal sector loans, i.e.,those run by the?rst branch,have not performed as well as those?nanced by the curb. This may be attributed at least in part to the tendency of local political elites to view the loans as grants rather than serious business obligations.

Gender represents the third major dimension along which credit markets are segmented in Lin Village.In contrast to the male-dominated savings and credit groups in Chandrapur,the ROSCAs in Lin Village(called chenghui or hui) are only managed by women.In China’s southern coastal provinces,women dominate hui participation because they have better developed social networks with one another, because they are more likely to remain in town year round(as opposed to men who may engage in seasonal migration),and because men are more likely to have other?nancing options(Tsai,2000).In Lin Village,a handful of middle-aged women run ROSCAs full time, but most hui organizers have other income-generating activities as well.The organizer with the largest volume of hui in Lin Village,for example,is a doctor who operates the village clinic from the courtyard home of the third Lin branch.At any given point in time,she runs up to?ve hui in the range of200,000RMB (US$24,000)each(i.e.,20members contribut-ing10,000RMB/US$1,200each meeting),and the interest rates run up to36%annually.Vil-lagers?nd Doctor Lin to be a trustworthy organizer because as the village doctor,she knows everyone and is unlikely to?ee town with their money.

The manner in which credit markets in Lin Village are segmented is only one example of how single-surname villages may be internally di?erentiated(Tsai,2002b).Indeed,regardless of the particular distribution of surnames at the village-level,many other patterns of local seg-mentation may be identi?ed in rural China depending on the structure of the economy,the nature of geographical constraints or resources, the extent of external versus internal migration, and the often path dependent developmental orientation of the local government(Unger, 2002;Walder&Oi,1999;Whiting,2001;Wu, 1998).

Finally,despite the shared popularity of informal?nance,the?nancial landscape in Lin Village di?ers signi?cantly from that of Chan-drapur.While the introduction of formal ?nance to the latter had the unintended e?ect of expanding the volume of the curb,in Lin Vil-lage the formal?nancial institutions have always been captured by local political elites who are not especially adept at business(cf. Adams et al.,1984;Otero&Rhyne,1994).The vast majority of commercially successful oper-ations in Lin Village have relied on informal ?nancing mechanisms that do not involve the ?rst branch of Lins.This is typical of China’s private sector as a whole.As of year-end2003, less than1%of all loans extended by state banks were going to private entrepreneurs (PBC,2004).Hence,even though there is political and economic segmentation at the local level,the expansion of informal?nance in China is largely attributable to the limited supply of formal credit to the nonstate sector.

5.CONCLUSION

The enduring popularity of informal?nance in rural China and India may be traced to a number of complementary factors:First,for-mal?nancial institutions and micro?nance programs are often unable to meet the demand for grassroots credit.But,merely increasing the availability of o?cial credit may not reach the targeted population because it still needs to be disbursed in some manner.Even if the supply of o?cial credit were su?cient,credit o?cers and poverty alleviation cadres charged with the task of extending loans to rural households often face local pressures and incentives for credit distribution that deviate from the origi-nal intentions of state authorities.This is especially the case when it comes to subsidized micro?nance programs because microloans are readily treated as political patronage.Mean-

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while,curb market operators at the grassroots level generally have a comparative advantage in serving rural households because they possess better knowledge about local market actors and conditions.

This is not to say,however,that informal ?nance trumps formal?nance in either eco-nomic or normative terms,but rather,that top-down e?orts at rural?nancial intermediation are not likely to achieve their objectives if they are not structured in a sustainable manner and implemented properly.It is no wonder that subsidized PA programs have low repayment rates when the loans are presented as develop-mental side-payments.MFIs that charge sus-tainable interest rates,on the other hand,tend to have higher repayment rates;and while reliable estimates of repayment rates in the curb are not available,it is probably safe to say that most informal?nanciers face hard budget constraints.While the constant threat of bankruptcy looms over the curb,the potential promise of additional subsidies fuels targeted microcredit.That is why informal?nance and micro?nance are imperfect substitutes.Rather than crowding out informal?nance,the infu-sion of public and donor funds into micro?-nance adds another discrete source of credit in local markets.As seen in the Chandahar case, the establishment of a village bank enabled pawnbrokers to expand their role as?nancial intermediaries to local populations in the Scheduled Tribe and Scheduled Caste lists. Meanwhile,the Lin Village case demonstrated that from the perspective of borrowers with lower political status,formal sector credit is actually more expensive to them than the curb. Informal and formal sources of?nance are not necessarily in competition with one another because they serve di?erent segments of local society.

Analytically,if we accept that local-level political and economic dynamics fundamen-tally mediate developmental outcomes,then it makes sense to transcend the conventional state–society dichotomy by disaggregating both state and society.Just as local state agents may subvert central state objectives,di?erent seg-ments of society may be at odds with one another.Recognizing the complexity of grass-roots segmentation ultimately has implications for the local distribution of both governmental and nongovernmental sources of?nance. Commercial bank credit,subsidized loans,mi-cro?nance facilities,and curb market?nancing all entail a mix of social,political,and eco-nomic incentives that are contingent on local context.Only when micro?nance programs are structured according to local needs and aimed at cost recovery will micro?nance hold greater potential for displacing usurious forms of informal?nance.

NOTES

https://www.wendangku.net/doc/977262566.html,eful compilation of the debates include Bouman and Hospes(1994)and Ho?,Braverman,and Stiglitz (1993).

2.By de?nition,informal?nance refers to?nancial ?ows that occur beyond the scope of a particular country’s formal?nancial system of banks,nonbanking ?nancial institutions,and o?cially sanctioned capital markets.Most countries,however,also have a range of ?nancial intermediaries that are best described as semi-formal because central banking authorities do not regard them as part of the formal?nancial system,but they may be approved by some government agency or entity.In India and China,the de?nitional boundaries among informal,semi-formal,and formal?nance have shifted due to changes in their political,macroeconomic,and regulatory environments.Furthermore,each of the categories encompasses a wide range of di?erent?nanc-ing mechanisms.In this article,formal?nance comprises not only conventional banking and?nancial institutions,but also o?cially sanctioned micro?nance programs, which include both subsidized and unsubsidized pro-grams,as well as state-sponsored and NGO-led https://www.wendangku.net/doc/977262566.html,rmal and semi-formal?nance will generally be discussed together because both fall beyond the scope of standard commercial and developmental/policy-ori-ented?nancial institutions.As the article discusses, many forms of informal?nance are subject to regulation in India,while most forms of informal?nance are simply banned in China.

3.RRBs represent a hybrid between cooperatives and commercial banks;they were established speci?cally to serve impoverished farmers,laborers,and microentre-preneurs in rural areas.

4.By1999India had a total of140,000branches of various rural credit facilities,which is equivalent to one formal?nancial institution per5,600rural citizens (Sinha,2000,p.66).

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5.In1984the responsibility for RCCs shifted from the PBC to the ABC.Also,the Agricultural Development Bank was established in December1993to handle the policy lending functions of the ABC so that the latter could devote itself to commercial banking activities.

6.During1978–98,one US dollar ranged from Rs.8.2 to41.3.The conversion for Rs.250billion is based on an annual average rate of20.3over that period.The?gure includes repeat assistance to the same families.

7.Especially during the1980s,nationalized banks had periodic loan melas,which entailed extending massive quantities of subsidized loans to targeted sectors of society without regard for their creditworthiness.

8.When it comes to subsidized loans for state-owned enterprises or collectives that employ large numbers of people,the argument could be made that propping them up has local employment and therefore,welfare impli-cations;but in the development?eld,micro?nance refers speci?cally to loans that are extended to individual, small business owners rather than larger scale corpora-tions that have larger capital requirements.

9.Note that the participating‘‘banks’’include com-mercial banks,RRBs,and cooperatives.For additional information about SHGs and what is known as the‘‘new micro?nance,’’see Bansal(2003),Satish(2001),and Wilson(2002).

10.For a comparison of the performance of NGO, joint NGO-government,and purely government-run micro?nance programs in China,see Park and Ren (2001).

11.Citibank has committed US$1.3million to FPC via Grameen Trust for expansion.Xinhua(November19, 2002).

12.For a list of micro?nance projects supported by international donors,see China Development Brief (1999).

13.NGO participants said they were willing to pay up to32.6%in annual interest,while participants in government-run PA programs were willing to pay up to21.4%annually and those in mixed NGO-government programs were willing to pay up to20.2%(Park&Ren, 2001,p.45).

14.The survey found39.6%of rural households relied on‘‘noninstitutional credit agencies.’’RBI(2000),Table 5.15.Note that‘‘high’’interest rates are de?ned as rates that exceed the interest rate ceilings in China and the anti-usury laws in India.These limits are in the range of10–12%/year for China and24%/year for India.

16.They are‘‘legal’’to the extent that they have not been banned explicitly.

17.China Minsheng Banking Corporation was estab-lished by the All-China Federation of Industry and Commerce in February1996.In November2000,it went public by issuing350million A shares on the Shanghai Stock Exchange.

https://www.wendangku.net/doc/977262566.html,munist-era references to pawnshops in impe-rial China condemned them as an expression of class-based exploitation.For example,Xin(1993).

19.For example,pawnshops in Xingtai,Hebei o?ered annual interest of40%to its depositors in1991(Xin, 1993).A more recent study found that some pawnshops charge monthly interest rates between5%and8%(i.e., up to72%interest annually),which is how they are able to o?er depositors such high rates of return.China Online(September9,1999).

20.The recti?cation e?ort was not entirely e?ective, however.The PBC issued additional regulations throughout the late1990s to standardize their operations and reiterate prohibitions against charging/o?ering high interest rates––again,to limited avail in implemen-tation.

21.Many nonborrowing and borrowing lenders prob-ably do not comply with the various acts.Moreover, informal moneylenders fall beyond the scope of regula-tion.I thank one of the anonymous reviewers for pointing this out.

22.In pre-colonial and colonial India,Multanis, Gujarati Shro?s,Marwaris,Nattukottai Chettiars,and Kallindaikurichy Brahmins represented the most prom-inent indigenous bankers.During the late colonial period,many invested in industry and commerce(cf. Bagchi,1972).

23.Of course,formal and informal sector loans do not have similar lending methodologies(in terms of size, length,repayment schedule,collateral requirements, etc.).But this section of the article only focuses on the actual?nancial cost of formal versus informal credit to examine the issues of access to and demand for credit, ceteris paribus.

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24.This phenomenon is not speci?c to India or China (Adams et al.,1984;Otero&Rhyne,1994).

25.The local case study from India––‘‘Chandrapur Village’’in South Rajasthan––was included in a larger project on micro?nance in general.The local case study from China––‘‘Lin Village’’in Wenzhou,Zhejiang––was part of a project on informal?nance and rural indus-trialization in Wenzhou.

26.The US$equivalent of the Indian Rupee went from Rs.9.8per1US$in1982–83to Rs.15.1in1988–89.

27.Note,however,that the village bank accounted for 80%of the total loan volume.28.‘‘Lin Village’’is a pseudonym.This case is based on?eldwork in Wenzhou,Zhejiang province,2000–01.

29.During my visit in2001,faded slogans from that period could still be seen from the wooden beams.The thought-reformed family was permitted to return to their home in1963,but as might be expected,during the Cultural Revolution much of the intricate artwork along the entryway,roof,windows,and walls was destroyed or damaged.

30.Lin Village is‘‘all mountains and water,’’as the locals put it.

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