Improving Access to Finance for India's Rural Poor

152 Pages·2006·0.928 MB·English

by  Basu, Priya

DDIIRREECCTTIIOONNSS IINN DDEEVVEELLOOPPMMEENNTT
Improving
Access to
Finance for
India’s Rural
Poor
PRIYA BASU

Improving Access
to Finance for India’s
Rural Poor

DIRECTIONS IN DEVELOPMENT
Improving Access
to Finance for India’s
Rural Poor
Priya Basu
THE WORLD BANK
Washington, D.C.
©2006 The International Bank for Reconstruction and Development / The World Bank
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ISBN-10: 0-8213-6146-5
ISBN-13: 978-0-8213-6146-7
eISBN: 0-8213-6147-3
DOI: 10.1596/978-0-8213-6146-7
Library of Congress Cataloging-in-Publication Data
Basu, Priya, 1966-
Improving acess to finance for India's rural poor / Priya Basu.
p. cm. -- (Directions in development)
Includes bibliographical references and index.
ISBN-13: 978-0-8213-6146-7
ISBN-10: 0-8213-6146-5 (pbk.)
1. Finance--India. 2. Microfinance--India. 3. Rural poor--India. 4. Financial
institutions--India. I. Title. II. Directions in development (Washington, D.C.)
HG187.I4B37 2006
332.1086'9420954--dc22 2006041750
Contents
Foreword ix
Acknowledgments xi
Abbreviations and Acronyms xii
Executive Summary xv
1. Introduction 1
India’s Rural Finance Landscape 4
Notes 8
2. Access to Rural Finance in India: The Evidence 10
Supply-Side Indicators of Access to Finance 10
Access to Rural Finance: Evidence from the Demand Side 16
Notes 26
3. What Constrains Access to Finance for India’s
Rural Poor? 28
Why Banks Are Reluctant to Lend to Rural Clients 28
Why Do Small Rural Borrowers Find Rural Banks
Unattractive? 38
Notes 40
4. Recent Efforts in India to Improve Rural Access
to Finance: The Role of Formal–Informal Linkages and
New Products 42
SHG-Bank Linkage Approach: Linking Commercial Banks
to Grassroots Borrowers 42
Microfinance Institutions 52
The “Service Provider” Model of Microfinance Piloted
by Private Banks 54
The Kisan Credit Card 56
Recent Innovations in Micro- and Weather Insurance 58
Price-Insurance and Risk-Management Products
for Farmers 61
Notes 63
v
vi CONTENTS
5. Meeting the Challenge of Scaling Up Access to Finance
for India’s Rural Poor: The Policy Agenda 65
Making the Formal Financial Sector Better at Banking the
Rural Poor 65
Scaling Up Microfinance 73
Notes 77
Appendixes
1 Structure of India’s Financial Sector 78
2 World Bank/NCAER Rural Finance
Access Survey (2003) 79
3 Retail Rural Finance Institutions:
Summary Review of Performance 82
4 Apex Rural Finance Institutions 92
5a Regulation of Rural Banking—Select
International References 98
5b Supervision of Rural Banking—Select
International References 100
6 Rural Banking Crises and Policy Reform—
Recent International Experiences 102
7 Enabling Framework for MFIs—Demands from
the Sector 104
8 Summary of Recommendations of Recent
Government Committees on Formal RFI Reforms 106
Bibliography 111
Index 115
Boxes
3.1 Income and Expenditure Patterns of
India's Rural Poor 29
3.2 Rural Banking—Government's Omnipresence 34
4.1 How Successfully Has SHG–Bank Linkage
Targeted the Poor? 45
4.2 Kisan Credit Cards: Making Inroads 57
CONTENTS vii
Figures
Es.1 Low Access to Formal Finance xvi
2.1 International Comparisons of Area Covered
per Branch 11
2.2 Insurance Penetration Across Countries
in 2000 12
2.3 Credit Distribution by Regional Income 14
2.4 Deposit Distribution by Regional Income 14
2.5 Branch Distribution by Regional Income 15
2.6 Branch Distribution by Regional Population 15
2.7 Population per Branch Across Regions, 2002 16
2.8 Low Access to Formal Finance, RFAS 2003 18
2.9 Distribution of Accounts 20
2.10 Credit Outstanding by Source 22
3.1 Status of Rural Banks in India 33
3.2 RFIs: Profitability (Return on Assets) 35
3.3 Credit Outstanding by Source 35
3.4 Deposits of Rural Finance Institutions—Costs and
Significance 36
A3.1 International Comparison of Government-Owned
Bank Assets 82
A3.2 Status of Rural Banks in India 84
A3.3 Credit Outstanding by Source 86
A3.4 RRBs: Asset Composition Trends 86
A3.5 Deposits of RFIs: Costs and Significance 87
A3.6 RFIs: Profitability (Return on Assets) 88
A3.7 RFI Capital Base Across Regions 89
A3.8 RFI Profitability Across Regions 90
A3.9 RRBs: Variations by Sponsor Banks 90
Tables
2.1 Coverage of Bank Branches 12
2.2 Regional Differences in Financial Services 13
viii CONTENTS
2.3 Rural Banking: Trends Over Time 16
2.4 Share of Rural Household Debt by Source of
Credit, All India, 1951–91 17
2.5 Summary Comparison of AIDIS 1991 and
RFAS 2003 18
2.6 Access to Deposit Accounts in Financial
Institutions, by Household Category 19
2.7 Access to Credit from Financial Institutions,
by Household Category 21
2.8 Aspects of Formal Borrowing and Its Costs 23
2.9 Collateral 23
2.10 Distribution of Insurance, by Percentage
of Households 24
2.11 Incidence and Size of Informal Borrowing
by Household Category 25
2.12 Source of Last Informal Loan, by
Percentage of Households 25
2.13 Uses of Last Informal Loan, by
Percentage of Households 26
3.1 Aspects of Formal Borrowing and Its Costs 39
4.1 Growth in Volumes of SHG–Bank Linkage 44
4.2 SHG Membership by Type of Household 45
4.3 Probit Estimates of Likelihood of a
Household's Being a Member of an SHG 46
4.4 Negative Binomial Regression Estimates
for SHGs in a Village, Andhra Pradesh 47
A4.1 NABARD’s Balance Sheet 94