A Framework for Building a Sustainable Rural Finance System (RFS) for India
This paper argues that in order to build a healthy rural financial system (RFS) for the 21st century, policy makers will have to focus on the four components of the RFS - regulation, intermediation, supply and demand - rather than focusing narrowly on formal sector rural financial institutions (RFIs), which represent only the supply and intermediation components.
The paper calls for a broadening of the concept of RFS to include credit, savings, insurance and remittance services, as well as pensions, provident funds, mutual funds, infrastructure and public goods finance.
The paper:
- Estimates, and looks at the demand for savings, credit and savings services from rural India;
- Looks at the supply of RFS from the informal sector, cooperative banks, regional rural banks, commercial banks and government-owned financial institutions;
- Examines the problems of rural financial institutions (RFIs), both mainstream and new-generation.
It advocates a three-track approach for building a sustainable RFS that would involve:
- Giving incentives to mainstream RFIs to serve the rural sector as a serious business;
- Encouraging new-generation RFIs with a supportive policy framework and financial resources and linkages to expand their services;
- Building a strong demand system in the form of community-based development financial institutions (CDFIs).
The paper makes detailed suggestions for establishing a RFS and concludes by stressing the urgency of re-engineering the rural financial system in India.
