Since the early national plans,successive governments in independent India have emphasizedthe link between improving access to finance, and reducingpoverty - a stance that has had influence globally. The needto improve financial access for India's poor, theoverwhelming majority of whom are concentrated in ruralareas, motivated the nationalization of commercial banks inthe late 1960s, and an aggressive drive through the 1970sand 1980s, to expand rural banking, coupled with policiesmandating banks to provide subsidized credit to ruralhouseholds. The 1990s saw the partial deregulation ofinterest rates, a gradual reduction in the Government'sstake in commercial banks, and increased competition in thebanking sector. Access to finance for the rural poor hasimproved somewhat over the past decades, with the publicsector commercial banks being the dominant players in theformal rural finance market. Yet, the vast majority ofIndia's rural poor, still do not have access t o formalfinance. The report examines the reasons, and factorsaffecting both banks, and their clients. First is theproblem of uncertainty - about the repayment capacity ofpoor rural borrowers, and their irregular/volatile incomestreams and expenditure patterns - which, in the absence ofcredit information, drive up default risk. Second, thetransactions costs of rural lending in India are high,mainly due to small loan sizes, high frequency oftransactions, large geographical spread, and heterogeneityof borrowers, and widespread illiteracy. Third, theGovernment policies have made things worse from thebanks' perspective, creating a "financialclimate" not conducive to lending in general, and ruralbanking in particular. New approaches and products toimprove 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 tobanks in the early 1990s, to over 700,000 in 2003 - has beentruly 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 inrural finance, that has recently caught the attention of theGovernment, is the establishment of a "warehousereceipts system' to cover the agricultural riskmanagement of products for farmers. The policy agenda toimprove access to finance by the rural poor looks atintroducing flexible products; the need for compositefinancial services; simplified procedures to access finance;and, improved staffing policies and doorstep banking,including an enabling policy, legal and regulatoryenvironment for micro-finance.While the importance ofmicrofinance in consumption-easing should not beunderestimated, its success in budding up poor peoples'assets, over the medium term, would much depend on effortsdirected at providing assistance in skills development,technology and marketing - all of which are critical toensuring that investments made by poor households, reapreturns and contribute to a sustained increase in incomesand improvements in rural livelihoods.
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