Access to financial markets is important for poor people. Like all economic agents, low-income households and microenterprise can benefit from credit, saving and insurance services. But financial markets, because of their special features, often serve poor people badly, since poor people often have insufficient traditional forms of collateral such as physical assets to offer. Thus the poor generally excluded from the formal financial institutions and have to depend on informal sector. In India, since the early national plans, successive governments have emphasized the link between improving access to finance and reducing poverty. But the vast majority of India’s rural poor still do not have access to either formal finance or microfinance. It was found that credit cooperatives, commercial banks, and other formal financial sector programs in rural areas have not displaced informal sources of credit, altogether. It is assessed that the share of rural informal credit in total outstanding debt has been certainly decreasing over the period from 1950 to 2002 with various financial initiatives of the RBI and legislation of the various state government to regulate moneylenders. However, about two-fifth of the rural household’s dependence on informal credit, even today, indicates further scope for financial inclusion in rural areas. According to author financial awareness has to be spread amongst the excluded masses that are illiterate and poor. Financial inclusion and financial literacy are two sides of the equation. Financial inclusion acts from supply side by providing financial markets/services that people demand whereas financial literacy stimulates the demand side by making people aware of what they can demand.
Rural Finance- An Unsolvable Question
(Author: Tiken Das)
Abstract: Access to financial markets is important for poor people. Like all economic agents, low-income households and microenterprise can benefit from credit, saving and insurance services. But financial markets, because of their special features, often serve poor people badly, since poor people often have insufficient traditional forms of collateral such as physical assets to offer. Thus the poor generally excluded from the formal financial institutions and have to depend on informal sector. In India, since the early national plans, successive governments have emphasized the link between improving access to finance and reducing poverty. But the vast majority of India’s rural poor still do not have access to either formal finance or microfinance. It was found that credit cooperatives, commercial banks, and other formal financial sector programs in rural areas have not displaced informal sources of credit, altogether. It is assessed that the share of rural informal credit in total outstanding debt has been certainly decreasing over the period from 1950 to 2002 with various financial initiatives of the RBI and legislation of the various state government to regulate moneylenders. However, about two-fifth of the rural household’s dependence on informal credit, even today, indicates further scope for financial inclusion in rural areas. According to author financial awareness has to be spread amongst the excluded masses that are illiterate and poor. Financial inclusion and financial literacy are two sides of the equation. Financial inclusion acts from supply side by providing financial markets/services that people demand whereas financial literacy stimulates the demand side by making people aware of what they can demand.
1.1. Introduction
Access to financial markets is important for poor people. Like all economic agents, low-income households and microenterprise can benefit from credit, saving and insurance services. Such services help to manage risk and to smooth consumption and allow people to take advantage of profitable business opportunities and increase their earnings potential. But financial markets, because of their special features, often serve poor people badly, since poor people often have insufficient traditional forms of collateral such as physical assets to offer. They are often excluded from traditional financial markets because transaction costs are often high relative to the small loans typically demanded by poor people. And in areas where population density is low, physical access to banking services can be very difficult. Apart from that, because of the Information Asymmetry the bank faces two types of risk- Voluntary and Involuntary. These risks make the acceptance of collateral necessary for the lenders. In case of those who are living below poverty line, have little or no asset to be provided as collateral. This is the case that makes them excluded from the credit markets. But the case of informal financial institutions is different as they have greater alternatives to accept as collaterals such as labor of the borrowers. Moreover the informal money lenders have somewhat greater information about the clients, as their lending operation generally stipulated local areas. Thus the poor generally excluded from the formal financial institutions and have to depend on informal sector.
Frequently asked questions
What is the central theme of "Rural Finance - An Unsolvable Question"?
The central theme revolves around the challenges faced by the rural poor in accessing financial markets and services. It explores the reasons why formal financial institutions often fail to adequately serve this segment of the population, leading to their reliance on informal sources of credit.
Why is access to financial markets important for poor people?
Access to financial markets, including credit, savings, and insurance services, is crucial for poor people as it enables them to manage risk, smooth consumption, take advantage of business opportunities, and increase their earnings potential.
What are the reasons that poor people are often excluded from formal financial institutions?
Poor people are often excluded due to several factors, including insufficient traditional forms of collateral, high transaction costs relative to small loan sizes, physical inaccessibility of banking services in low-density areas, and information asymmetry leading to risks for lenders.
How has the Indian government attempted to improve financial access for the rural poor?
Successive governments in India have emphasized the link between improving access to finance and reducing poverty. This has led to initiatives such as the establishment of rural cooperative credit banks, the nationalization of commercial banks, and subsidized credit programs like the Integrated Rural Development Program (IRDP).
What is the outcome of the IRDP program mentioned in the text?
The Integrated Rural Development Program (IRDP) experienced significantly low repayment rates, falling below 60% in 1989 and further declining to just 31% by 2001, indicating its limited success in providing sustainable financial access.
To what extent do rural households still depend on informal credit?
Despite various financial initiatives, approximately two-fifths of rural households still depend on informal credit, highlighting the continued need for improved financial inclusion in rural areas.
What is the role of financial literacy in improving financial inclusion?
Financial literacy plays a crucial role in stimulating the demand side by making people aware of the financial services available to them. It complements financial inclusion, which acts from the supply side by providing accessible financial markets and services.
What challenges do formal financial institutions face when lending to the poor, as mentioned in the text?
Formal financial institutions face challenges due to information asymmetry, which leads to two types of risk: Voluntary and Involuntary. These risks make the acceptance of collateral necessary for the lenders.
What is the Rural Finance Access Survey (2003) and its finding on access to credit?
According to the Rural Finance Access Survey (2003), 70 percent of marginal/landless farmers do not have a bank account and 87 percent have no access to credit from a formal source, this illustrates the continued heavy reliance on informal finance for the rural poor.
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- Tiken Das (Author), 2013, Rural Finance. An Unsolvable Question, Munich, GRIN Verlag, https://www.grin.com/document/231178
