Rural Finance in Contemporary Times: Interface with Microfinance (in India)

In September, 2004 a colloquium was held at the Indian Institute of Management, Ahmedabad, which brought together leading bankers and microfinance practitioners to discuss the interface between rural finance and micro finance. When people talk of rural finance in India, the stereotype offered is that of a banking system that fails to reach out to the poorer clients and, when it does, fails to recover the money so disbursed. The counter-point offered is usually the magic wand of microfinance. Participants in this Colloquium set out to examine where these two worlds meet and how they could learn from each other. The discussions were organized around three themes:

  1. the legacy of the banking system,
  2. the limitations of microfinance, and
  3. an assessment of the potential.

On the issue of legacy, the message was clear that the intervention of the state in certain aspects has been undesirable. These areas were clearly identified as granting general pardon for loans, tinkering around with interest subsidies, and interfering with the commercial aspects of banking. The limitations of the microfinance institutions were in terms of their sustainability and their inability to draw commercial capital and grow rapidly. However, these limitations were partly seen as a consequence of regulatory apathy and support from the state both in terms of formulating and articulating a regulatory framework and also in terms of the central bank being reluctant to supervise the efforts. These did not help in enhancing the legitimacy of microfinance institutions.

This colloquium report is a fascinating example of policy dialogue in which key actors set out their views on the selected topic and provide critical guidance for decision-makers. Some examples: “Most of us assume that the quality of life will automatically change if only we have money. Therefore, we attribute most of the ills of the rural areas to lack of access to credit. … It is a fallacy.” “We need to find mechanisms of providing an opportunity for depositors and for protecting their interests. This can be done by having depositors involved in governance.” “Commercial banks need to recognise the value of providing consumption credit – a single-minded focus on production credit may be self-defeating since incorporating consumption needs appears to reduce loan default.” “It is important that institutional support for micro-livelihoods be in place for financial services to have value.” “The century old rural cooperative credit system is in poor shape and carries a warning for those who do not wish to learn from history.”

This report contains much of interest not only for people in India but for all policy makers with an interest in the problems of and prospects for improving rural financial services. It is also an excellent example of the way in which policy dialogue can be conducted, in the interests of improving the policy framework to enable mainstream banks and microfinance institutions meet the challenging demand for financial services in rural areas.

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