A Financial System for India's Poor

This paper argues that it is not just policies, but institutions and markets that need to be transformed to improve the efficiency of the formal rural finance sector. It seeks to assess whether, and to what extent, the social-banking stance of successive post-independence governments in India has improved access to finance for the poor. The paper:

• Presents some evidence on the level of inclusiveness of Indian banking, using measures of access to finance;
• Traces some positive developments over time;
• Highlights the current inadequacies in access to finance for India's rural population, particularly the poor;
• Examines why results have not met expectations;
• Tries to explain this divergence between strategy and outcomes;
• Provides suggestions on how to build a more inclusive financial system.

It lists the following steps for tailoring products and services to the needs of the poor:

• Introducing flexible products and composite financial services;
• Simplification of banking procedures;
• Better staffing and doorstep banking.

It offers the following suggestions for building a more inclusive banking system:

• Improving incentives, promoting competition and enhancing rural financial markets;
• Making priority sector lending obligations tradable;
• Reconsidering interest rates caps;
• Allowing entry of new private banks in rural finance;
• Providing better regulation and supervision to pave the way for the restructuring of rural banks.