Rural Finance in Contemporary Times: Interface with Microfinance

This document reports on a colloquium between leading bankers and microfinance practitioners in India to examine where these two worlds meet and what they could learn from each other. The colloquium discussed:

• The legacy of the banking system;
• The limitations of microfinance;
• An assessment of its potential.

The main points that the participants made were:

• State intervention is undesirable in the following areas:
  • Granting general pardon for loans;
  • Tinkering around with interest subsidies;
  • Interfering with the commercial aspects of banking.
• The limitations of microfinance institutions (MFIs) were their:
  • Lack of sustainability;
  • Inability to draw commercial capital and grow rapidly.
• The causes of these limitations were:
  • Regulatory apathy and lack of support from the government;
  • Lack of interest from the Central Bank.

The participants concluded that:

• There is a lot of potential in rural markets in the areas of construction, non-farm enterprise, handloom, garment making, quarrying, etc.;
• There is scope for both banks and MFIs to intervene in these areas;
• There is a need to address the issue of risk management in microfinance;
• The State can positively and effectively contribute to microfinance.