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= provision of financial services

to the poor

What it often is
Micro-credit Group

What it really should be

Range of financial services Group and individual lending Profitable activity

lending Social/charitable activity

Risk management challenges due to information asymmetry problems Accessibility (geographic accessibility and easiness to deal with) No collateral, Low value and cash intensive nature of the business Staff training and motivation

High transaction costs

Decision to take loan Adverse selection

Loan usage

loan repayment

Moral hazard

Dont know Clients type

Interest rate reflects proba of default

Need to increase interest rate

Safer clients drop out

Providing credit can become impossible

Can not observe what client is doing

Bad loan usage

Strategic unwillingness To repay


population lives in rural areas: geographical access difficult Informal activities: need access at flexible times Illiteracy: difficult to deal with traditional services Low value of transactions Lack of collateral


of trained staff Lack of motivated staff Difficult to incentives staff


Deccan, late 19th Century: peasant riots on account of coercive alienation of land by moneylenders.
Organization of cooperative societies as alternative institutions for providing crdit by british government


Credit was viewed as essential part of fight against poverty which led to following measures: Expansion of the institutional structure Directed lending to disadvantaged borrowers and sectors Interest rates supported by subsidies Institutional vehicles: cooperatives, commercial banks and Regional Rural Banks [RRBs].

1950 & 1969: emphasis on the promoting of cooperatives. 1969: nationalization of the major commercial banks: beginning of commercial bank branch expansion in the rural and semi-urban areas. 1976: Regional Rural Banks (RRB), low cost institutions mandated to reach the poorest in credit-deficient areas During this period, intervention of the RBI (Reserve Bank of India) was essential: special credit programmes for channeling subsidized credit to the rural sector (concept of priority sector)


Enhance the areas of commercial fredon Increase their outreach to the poor Stimulate additional flows to the sector. Liberalising interest rates for cooperatives and RRBs, Relaxing controls on where, for what purpose and for whom RFIs could lend, reworking the sub-heads under the priority sector, Introducing prudential norms Restructuring and recapitalising of RRBs.


Defects in policy design, Infirmities in implementation Inability of the government of the day to desist from resorting to measures such as loan waivers. High defaults The banking system - was not able to internalise lending to the poor as a viable activity but only as a social obligation More and more difficult for commercial bankers to accept that lending to the poor could be a viable activity.


Against rural population of 741.0 million, 500 million people un-served Population per branch: 22,793 Penetration of savings accounts is below 18% As against 104% in urban and semi-urban areas Number of villages per branch: 19 High dependence on informal sources

36% of rural credit from informal sources Dependence even higher for lower income households: 78%


Demand: Rs. 450 billion/y

500 million un-served poor to cover all parts of India Need protection against all risks

Disbursed: 39 billion
Less than 2 million Households reached 60% in South Insurance under-delivered Increase impact
Scaling up

Need employment opportunities Market constraints


SHG-Bank linkage model

Loan at 9% Bank


No liability


Group formation /linkage



of adequate quantities of risk capital Lack of long-term finance to pay for creation of the necessary infrastructure and preoperative expense Lack of well trained staff in adequate numbers at all levels technology