FUNDING AND VIABILITY OF RURAL DEVELOPMENT BANKS

Currently, the two major funding sources for RDB"s are foreign and domestic governments. The terms imposed by these sources, however, (as well as by subsidiary sources such as private financial institutions), significantly restrict RDB credit policies and operational efficiency in ways that can affect RDB viability. Such restrictions are the recommendations, usually accepted by RDB"s, that RDB clients adopt modern technology, or that financing of short-term working capital be prohibited, or that onlending be made at concessionary interest rates. Taken together, these restrictions create a bias in favor of labor-displacing imported capital goods and larger farmers. Concessionary interest rates in particular lead, according to the World Bank, to resource misallocation, wealth gains by larger farmers, losses for RDB"s, and political corruption and abuse. In addition, the tendency by RDB sources to extend funds on the basis of loan disbursement rather than on loan management quality encourages RDB"s to accelerate disbursements without paying sufficient attention to clients" credit worthiness. This ultimately leads to an evaporation of external source funding, undermining the RDB"s long-term viability. One solution to these problems is to develop new sources of funding that are not subject to the above limitations. Three such possible sources are examined: deposit mobilization, which would afford RDB"s a steady return flow of funds; the use of local and foreign bond issues; and earmarking goverment revenues. It is concluded that the first two of these are preferable and are also potentially more successfull methods of funding, provided they are intitiated at an early stage in a RDB"s life-cycle. A list of 8 references (1971-78) is appended. Paper copy $3.64 Microfiche $1.08