Challenges in Developing an Inclusive Rural Financial System in India

Rural finance comprises credit, savings and insurance (or insurance substitutes) includes agree cultural finance and microfinance in rural areas, whether provided through formal or informal mechanisms.

Providing financial services in rural areas is a challenge as agriculture and other rural economic activities have unique characteristics of dependence on natural resources, long production cycles and vulnerability to multiple risks (all of us remember the old adage "Indian agriculture is a gamble in monsoon"). Further, the sub-division of land and small ticket size of rural non-farm activities require the provision of small sized loans in large numbers often raising the operational costs for banks. Moreover, with the widening of the ambit of non-agricultural activities, the need for non-agricultural rural finance too has gone up considerably. While poorer groups might need basic savings services and micro-credit to cover production costs and emergency expenses, farmers and farmers' organisations require larger amounts of credit to finance production, inputs, processing and marketing besides risk mitigation products, for example, insurance for loss of life and assets. The new rural finance paradigm needs to be based on the premise that 'rural people are bankable' and rural clientele is not limited only to the farmers & uneducated but also includes a generation which can use & adopt technology. It, in turn, advocates a demand-driven design and efficient provision of multiple financial products and services through an inclusive financial sector comprising sustainable institutions serving a diverse rural clientele.

Thus, developing an inclusive yet sustainable rural financial system is extremely challenging and involves comprehensive understanding of host of complementary issues, which I would like to subsume under a broad 7Ps' Framework:

· Product strategy: For catering to the varied needs of small ticket size transactions, whether a bouquet of diversified products and services can be developed without compromising on the flexibility, continuous availability and convenience of the products? Which types of financial products have the greatest impact on reducing poverty and lifting growth rates in deprived districts and regions?

· Processes: What kinds of business processes can help banks to reach underserved segments and provide hassle-free near doorstep service to the customers without jeopardising financial viability? How do we design an efficient hub & spoke model to overcome the hurdles in the agent led branchless banking?

· Partnerships: What are the constraints faced by the underserved and/or excluded segments in accessing financial services from different types of service providers? Are the bank - non-bank partnerships, such as, Business Correspondents, SHGs, MFIs, etc. working efficiently in easing the accessibility and availability of financial services?

· Protection: What measures and mechanisms are needed to protect both the providers and the receivers of rural finance from abuse and misuse of such services? Whether enough risks mitigants are there for the borrowers given the higher vulnerability in the sector? Are lenders protected against ebb & flow of uncertainty in credit culture?

· Profitability: Whether the business strategies and delivery models are geared to provide affordable and acceptable services to the rural clientele while ensuring that rural finance service providers function profitably on a sustained basis? How do we tap into the customer willingness to pay through an appropriate pricing model?

· Productivity: How do we increase the productivity of financial services provided in the rural areas? What are the strategies needed to synergize other resources with finance (say, under a "credit plus" approach) to ensure more productive and optimal use of financial services?

· People: Are the frontline staff of the financial service providers well-equipped to meet the needs of driving the process of financial inclusion in terms of knowledge, skill and attitude? Do these people have the capacity, comprehension and commitment to identify potential customers and offer them timely advice and comprehensive services?

Many of these are the age-old questions which unfortunately remain pertinent even today and pose a significant challenge to the policy-makers and regulators. Having spoken about the challenges, let me outline some of the developments that have taken place in recent times in rural finance space with specific reference to the three sub-themes of this seminar and highlight some of the critical issues related to these sub-themes.