Finance & PSD Impact JUNE 2018 The Lessons from DECFP Impact Evaluations ISSUE 50 Our latest note looks at whether grants for technical assistance can lower interest rates and increase lending for rural borrowers by making small financial institutions more efficient. Can Technical Assistance Sow the Seeds for Rural Finance? Miriam Bruhn, Rekha Reddy, and Claudia Ruiz Ortega Government interventions to lower The program started in 2004 and has interest rates and expand credit to the rural disbursed grants to different financial sector are common in developing countries. institutions each year. We study the impact of Some of these policies, like interest rate the grants that were disbursed between 2004 subsidies, though well-intentioned, can be and 2008. distortionary and achieve opposite results. Although grants can be used to purchase Interventions that tackle constraints that equipment or boost the capital of financial prevent the market from allocating credit on institutions, most grants were for technical its own may achieve better results. One such assistance, provided through a network of constraint often present in rural areas is lack accredited specialists. Examples of technical of technical capacity. Rural financial assistance include credit risk management, institutions are often ill-equipped to screen, capacity building for management and staff monitor and manage risk and to price and IT systems selection. The average size of products. This lack of capacity increases these grants was USD$4,000. operational costs which are passed on to borrowers in the form of higher interest rates Study Design and Data and less lending. We focus on the impact of the program on A potential intervention to address these credit unions, which make up 20 percent of capacity constraints consists of technical the financial intermediaries that have assistance for financial institutions. We study received grants through the support program. the effects of such a program in Mexico, that We chose to look at credit unions since they is being run by the development finance are supervised by the National Banking and institution Financiera Nacional de Securities Commission (CNBV), which Desarrollo Agropecuario, Rural, Forestal y houses a repository of their financial data. Pesquero (FND). From the CNBV, we obtained financial statements for all credit unions operating in Grants for Technical Assistance Mexico from September 2002 to December FND’s core activities include lending 2012. We merged this information with an directly to rural firms and providing second- FND-provided list of credit unions that tier financing to financial intermediaries. obtained a grant through the support To strengthen these activities FND also program. This results in data for 124 credit runs a capacity building support program unions, of which 65 received a grant in (Programa de Apoyos). This program different years from 2004 to 2008. provides grants for capacity building to We estimate the effects of FND grants financial intermediaries with the goal of using a difference-in-difference estimation getting them ready to receive FND loans and that relies on the comparison of never treated more broadly to develop sound financial and ever treated credit unions over time, as institutions that can responsibly reach more well as by considering the timing of rural borrowers. treatment. Do you have a project you want evaluated? DECRG-FP researchers are always looking for opportunities to work with colleagues in the Bank and IFC. If you would like to ask our experts for advice or to collaborate on an evaluation, contact us care of the Impact editor, David McKenzie (dmckenzie@worldbank.org) We also use propensity score matching to that received grants also received loans create treatment and control groups that have from FND. We conduct several checks to identical pre-program means and changes in make sure this result is not driven by FND outcomes variables. To check the robustness loans. In fact, the effects are similar if we of our results we implement four different only look at those credit unions that did matching techniques. not receive an FND loan. Results Figure 2: Average total loan portfolio for • The program lowered lending interest credit unions in the treatment and control rates by up to 2.6 percentage points, from group (caliper matched sample) a pre-program average of 17.8 percent Total Loan Portfolio 150000 (figure 1). 100000 Figure 1: Average lending interest rates for credit unions in the treatment and 50000 control group (caliper matched sample) Lending Interest Rate 19 0 2002 2004 2006 2008 2010 2012 year 18 Control Treatment 17 16 Policy Implications 15 In the context of the program we studied 14 in Mexico, technical assistance allowed rural 2002 2004 2006 2008 2010 2012 year credit unions to increase their operating Control Treatment efficiency and reduce their non-performing loans ratio. Part of these gains translated into • This drop seems to be due to reduced higher returns for the credit unions, but they operating costs and a lower non- were also passed on to the final borrowers in performing loans ratio. That is, the the form of more credit at lower lending support program helped credit unions to interest rates. make their operations more efficient and While government support to rural to better screen and monitor borrowers. financial institutions is often provided in the • We also see an increase in returns-on- form of interest rate subsidies, guarantees or assets (ROA) due to the program. credit lines, this study suggests that technical assistance may be an equally important tool • Finally, the program increased the value to consider for supporting the development of of the loan portfolio by about 50 percent financial institutions. (figure 2). About half of the credit unions For further reading see: Bruhn, Miriam, Rekha Reddy, and Claudia Ruiz Ortega. 2018. “Sowing the Seeds for Rural Finance: The Impact of Support Services for Credit Unions in Mexico.” World Bank Policy Research Working Paper No. 8483. Recent impact notes are available on our website: http://www.worldbank.org/en/research/brief/finance-and-private-sector-impact-evaluation- policy-notes