Scaling-up Access to Finance for India's Rural Poor
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Washington, DC
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Since the early national plans,
successive governments in independent India have emphasized
the link between improving access to finance, and reducing
poverty - a stance that has had influence globally. The need
to improve financial access for India's poor, the
overwhelming majority of whom are concentrated in rural
areas, motivated the nationalization of commercial banks in
the late 1960s, and an aggressive drive through the 1970s
and 1980s, to expand rural banking, coupled with policies
mandating banks to provide subsidized credit to rural
households. The 1990s saw the partial deregulation of
interest rates, a gradual reduction in the Government's
stake in commercial banks, and increased competition in the
banking sector. Access to finance for the rural poor has
improved somewhat over the past decades, with the public
sector commercial banks being the dominant players in the
formal rural finance market. Yet, the vast majority of
India's rural poor, still do not have access t o formal
finance. The report examines the reasons, and factors
affecting both banks, and their clients. First is the
problem of uncertainty - about the repayment capacity of
poor rural borrowers, and their irregular/volatile income
streams and expenditure patterns - which, in the absence of
credit information, drive up default risk. Second, the
transactions costs of rural lending in India are high,
mainly due to small loan sizes, high frequency of
transactions, large geographical spread, and heterogeneity
of borrowers, and widespread illiteracy. Third, the
Government policies have made things worse from the
banks' perspective, creating a "financial
climate" not conducive to lending in general, and rural
banking in particular. New approaches and products to
improve rural access to finance in India are reviewed,
namely, the 'Self-help Groups (SHGs) Bank Linkage'
model, the growth of which - from just 500 SHGs linked to
banks in the early 1990s, to over 700,000 in 2003 - has been
truly remarkable; specialized microfinance institutions;
and, partnerships between private Banks,, micro-financiers,
and service providers, including the Kisan Credit Card.
Furthermore, a potential means of reducing default risk in
rural finance, that has recently caught the attention of the
Government, is the establishment of a "warehouse
receipts system' to cover the agricultural risk
management of products for farmers. The policy agenda to
improve access to finance by the rural poor looks at
introducing flexible products; the need for composite
financial services; simplified procedures to access finance;
and, improved staffing policies and doorstep banking,
including an enabling policy, legal and regulatory
environment for micro-finance.While the importance of
microfinance in consumption-easing should not be
underestimated, its success in budding up poor peoples'
assets, over the medium term, would much depend on efforts
directed at providing assistance in skills development,
technology and marketing - all of which are critical to
ensuring that investments made by poor households, reap
returns and contribute to a sustained increase in incomes
and improvements in rural livelihoods.
Palabras clave
ADVERSE SELECTION, ASSET CLASSIFICATION, BANK ACCOUNTS, BANK BRANCHES, BANKING CRISES, BANKING SERVICES, BANKS, BONDS, BORROWING, BROKERS, CAPITAL ADEQUACY, CAPITAL REQUIREMENTS, CAPS, COLLATERAL, COMMERCIAL BANKS, COOPERATIVE BANKS, COST SAVINGS, CREDIT, CREDIT CARDS, CURRENT EXPOSURE, DEBT, DEFAULT RISK, DEPOSITS, DEREGULATION, DERIVATIVES, ECONOMICS, EXPENDITURE, EXPENDITURES, EXPOSURE, FINANCE COMPANIES, FINANCE INSTITUTIONS, FINANCIAL DISTRESS, FINANCIAL INTERMEDIATION, FINANCIAL NEEDS, FINANCIAL SERVICES, FINANCIAL SYSTEM, FINANCIAL TRANSACTIONS, FUTURES, GRAMEEN BANK, INCENTIVE FRAMEWORK, INCOME, INSTITUTIONAL STRUCTURES, INSURANCE, INSURANCE COMPANIES, INTEREST RATE, INTEREST RATES, L C, LAWS, LEGAL FRAMEWORK, LINKAGES, MICROFINANCE, NATIONALIZATION, OBLIGATION, PORTFOLIOS, PRIVATE BANKS, PRIVATE SECTOR, REGULATORY FORBEARANCE, REGULATORY FRAMEWORK, RESERVE BANK OF INDIA, RISK MANAGEMENT, RURAL BANKS, SAVINGS, SAVINGS ACCOUNTS, SECURITIZATION, SERVICE PROVIDERS, SMALL LOANS, SMART CARDS, TRANSACTION COSTS, VULNERABILITY