Development Economics and Public Policy Cluster
Research
Rural Micro Finance in India
IDPM and the World Bank Mission on Improving Access to Rural Finance in IndiaThe macroeconomic crisis of 1991 forced India to address problems of unviability and inefficiency across a number of sectors of the economy, including the financial sector. In India, the government owns the majority of the formal banking sector which consists of Commercial Banks, Co-operative Banks (both rural and urban) and Regional rural Banks. The existence of large number of loss-making units with the extensive state rural banking system gave cause for particular concern. The study by Thankom Arun with Paul Mosley (Sheffield University) and Samuel Maimbo (World Bank) examines the ability of the Indian rural financial sector to meet the credit needs of lower income groups, and, in future, those who are currently financially excluded.
The major objective of this research is to analyse key constraints and challenges to better financial access for the rural poor such as examining the need for better institutions, and new products and technology, to bridge the gaps between the supply of, and demand, for providing financial services for the rural poor. The study examines the factors which has prevented the formal financial institutions from reaching out to the poor. Also the study explores the factors constraining the outreach and sustainability of micro finance institutions in India, including capacity constraints, financial sustainability and the legal and regulatory framework. As part of the study, the team members participated in a World Bank Mission on Improving Access to Rural Finance in India, and, visited New Delhi, Mumbai, Hyderabad and Lucknow. The mission met with senior officials from the Government, the Reserve Bank, the National bank of Agricultural and Rural Development (NABARD), Public and Private financial institutions, and, micro finance practitioners and self help groups.
The emerging conclusions of the study orient towards the key themes of (1) lack of financial viability across much of the Indian rural credit system (2) continuing financial exclusion of many poor people and (3) the need of poor people for flexible, easy to access financial services which protect against risk. The poorer people are, the greater the damage that is done by any decline in assets or income and the greater the need for financial services of a type which will protect the household's livelihood rather than promote it at the cost, perhaps, of greater financial and possibly physical vulnerability.
More information is available from Dr Thankom Arun .