Rural Financial Institutions and Agents in India: A Historical and Contemporary Comparative Analysis

This paper traces the forces that have led to the development of particular rural financial institutions in the country, in order to:

• Show the present gap between rural financial needs and provision;
• Assess policy options to reduce this gap through institutional development, linkages and reform.

The paper examines:

• The latter years of pre-independence India and how official responses to the perceived problems of rural indebtedness and land transfers at that time have largely shaped rural finance policy to date;
• Post-independence policy up to the 1990s – the institutional forms favored by the State to provide financial services to the rural sector namely, cooperatives, commercial banks and regional rural banks (RRBs);
• The reform process and the growth of microfinance institutions (MFIs), the self-help group (SHG) - bank linkage program, and the Business Facilitator/Correspondent Models;
• The characteristics of exclusion and recent institutional moves aimed towards reducing it;
• Further policy options for reducing financial exclusion and their implications for institutional development and reform.

The paper concludes that:

• Rural financial institutions in India face formidable challenges;
• One single institutional form is unlikely to address the needs of a large, poor, diverse and dispersed population;
• The spatial spread of certain institutional forms, notably commercial banks and cooperatives is impressive;
• Financial institutions are beginning to see the rural poor as a business opportunity and this will be an important driver of institutional change and provision.