Microfinance Horizon

Author: Madhurima Bhattacharyay

Abstract:

An outstanding economic growth and a bright future prospect notwithstanding, poverty reduction is still the most daunting challenge for India. Strengthening access to financial services for the rural sector, particularly the rural poor, is essential for attaining income poverty as prescribed in the Millennium Development Goals (MDGs). Despite various initiatives taken for the expansion of the commercial bank branch network into the rural and semi-urban areas of the country to promote lending to key disadvantaged and underprivileged economic sectors, their socio-economic impact did not match expectations as planned. India needs to develop a more inclusive financial market by enhancing direct access to finance for poor communities and small rural businesses. This paper examines the current – and potential – role of the financial sector, particularly microfinance, in developing a more inclusive and robust economy. This paper which examines rural finance for the poor and its impact on income poverty also analyzes the performance of the rural financial services system in India and outlines trends and patterns in farmers’ access to financial services over the course of the past half-a- century. In particular, it analyzes the performance of microfinance institutions (MFIs) in the rural area, with particular emphasis on commercial bank-linked, largely successful Self-Help Group (SHG) programs. Finally, the paper proposes appropriate measures and policies to strengthen the accessibility of financial services to the targeted group of rural poor and discusses how a variety of financial institutions can be mobilized to serve the rural poor most efficiently and effectively. We find that India needs to, among other appropriate policy interventions, restructure the formal rural banking system, and implement cost effective, flexible and convenient ways to reach rural farmers. For reference, we provide an outline of current policy on priority-sector subsidized lending.

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