Rural Finance

Around 68% of the India's poor live in rural areas .Financial services are key to enhancing
economic development and reducing poverty in this rural areas. It can be done by improving the
well-being of rural people by building their productive, social, and environmental assets and
financial institute help in this. In India the concept of bank has come long before with
moneylender. Though their intention was not to development of rural people. Now there are
several no of financial organizations working for rural development

FINANCIAL INSTITUTE IN RURAL DEVELOPMENT:

1. RBI
2. NABARD
3. COMMERSIAL NATION BANKS
4. REGIONAL RURAL BANKS

5. MICRO –FINANCE(SHG,Joint Liability Group , SAKHI )

6. CENTRAL (OR DISTRICT) CO-OPERATIVE BANK
7. STATE CO-OPERATIVE BANK
8. AGRICULTURE AND RURAL DEVELOPMENT BANKS
9. INSURANCE
10. MONEY LENDERS

All these financial institutes engage in rural development in different ways. The main function
they have done by giving credits and implementing diff government project for poverty
elevation.

P RIMARY FEATURES OF THE OLD AND NEW PARADIGMS IN RURAL FINANCE :

The mode of function of the rural finance institution has been change in many respects. These
are as follows-

Features Directed Ag. Credit Financial Systems

Paradigm(Old) Paradigm(New)
1. Chief aims Boost agricultural production Reduce market imperfections
and
Reduce poverty
transaction costs for income
expansion and

poverty reduction
2. Role of financial Help the poor Intermediate efficiently

markets Stimulate production

3. View of users Beneficiaries: borrowers
4. Subsidies Heavily subsidy dependent
5. Sources of funds Vertical: governments and
donors
6. Associated Dense, fragmented, and
vertical were targets met?
information systems
Clients: borrowers and
depositors
Increasingly independent of
subsidies
Horizontal: primarily
voluntary deposits
Less dense and mainly
horizontal management
information

7. Sustainability Largely ignored Major concern

8. Outreach Mostly ignored Primary concern
9. Evaluations Credit impact on beneficiaries Performance of financial
institutions mostly secondary
mainly primary data information

Challenge of Rural Financial Institution:

1. General characteristics of rural areas such as poorly developed infrastructure, dispersed

economic activity, and inadequate availability of skilled personnel constrain the provision
of financial services in rural areas.
2. Low population density, small average loans, and low household savings increase the
transaction costs per monetary unit of financial intermediation.
3. Seasonality of agricultural production and susceptibility to natural disasters (such as
flood, drought and disease) heighten the probability of covariant risks (in prices and
yields) and add to the risks and costs of rural financial intermediation.
4. Poor governance, corruption, and other political factors that raise risk.
5. Poor operating systems and low skills of managers and staff.
6. Additionally, the supply of credit services is limited by the lack of collateral and lack of
risk management mechanisms.

Opportunities:

1. Huge demand and supply gap. India’s population is more than 1000 million, around 350
million, are living below the poverty. Only 35% access loan from the formal sources and
75% from the Informal sources.
 2. Annual credit demand by the poor is estimated to be about Rs 60,000 crores. And only
12,000 crores are disbursed. (April 09)
3. Employment Opportunity.
4. Huge Untapped Market.
5. ICICI, AXIS, ING VISYA, YES BANK and others Foreign Banks enter to rural sectors.

INITIATIVE OF FINANCIAL INSTITUTE FOR RURAL

DEVELOPMENT:
A) Extension of credit delivery to rural people
1. Permitting the use of banking facilitators/correspondents.
2. Augmentation of credit flow to the agriculture and other priority sectors as well as
also to the distressed farmers and the areas hit by natural calamities.

3. Simplification of systems and procedure so that poor people can avail the banking
facilities.
4. Providing greater operational flexibility to the rural banks (RRBs).

But this credit delivery is not an easy task. The financially excluded sections largely comprise
marginal farmers, landless labours, oral lessees and women .The North-East, Eastern, and
Central regions contain most of the financially excluded population which lead to social
exclusion. But government of India initiate a lots of programmed most important of them is
financial inclusion.

WHAT FINANCIAL INCLUSION IS ALL ABOUT?

Low income groups don’t have access to the formal banking systems as they don’t have the
documents needed to open a bank a/c. Therefore, they rely on the informal sector (chit funds) for
their savings and loan requirements. Financial inclusion is to get this vast low-income population
into fold of the basic banking system through no-frill a/c (no frill a/c restricted in nature and put
a limit on the number of transactions.

Simplification of know your customer’s norms, government facilate the people by issuing
office identification.

B) Minority favoring branches:

RBI instructs to the entire bank that branches should be opened in minority dominated
district across India. So that banking services such as savings, credit, insurance, leasing and
remittance facilities etc can be give to the door steps of remote rural areas.

C) Farmers’ Club:
All Bank make policy that all the branch have at least one farmers club. Object of this farmers
club is to help the farmers to update knowledge on scientific farming. It organizing periodical
extension activities involving Krishi Vigyan Kendras, Agriculture college ,horticulture , Animal
husbandry departments , Experts and successful farmers. Such meets are aimed at creating
awareness among farmers on latest package of practices for scientific farming.

For example –Pragathi Gramin Bank has been already made such types of farmers club. And
farmers club development cell at their head office.

D) IT solution:
Now a day’s banking institute tie up with the some IT solution company to providing banking
facilities at door steeps of rural people.

E) Branchless Banking Concept Implementation:

Some bank like SBI, UBI, Pragathi Gramin Bank etc has been taken up the implementation of
pilot project on the introduction of Smart Card to social security pensioners and NREGS
beneficiaries. Their payment is going to be done through this card. Though most of NREGS
payment has been given through post office.

F) Institution for training SHG:

Now a day’s many of the banks initiate to give training to the SHG people and they established
their own institute. Ex. UBI has such type of training center.

G) Kisan Credit card:

To provide adequate and timely credit support from the banking systems to the farmers for their
cultivation needs including purchase of all inputs in a flexible and cost effective manner.

J) Micro-finance:
The self-help group bank linkage programme continued to be the main micro-finance model by
which the formal banking system reaches to the micro-entrepreneurs including farmers. This
micro-finance system launched as mainstream programme for banking by the poor mainly the
marginal farmers, landless labours, artisans and craftsmen and others like hawkers, vendors of
rural areas.

• Its advantages are transaction costs reduce for both bank and poor.
• Door step saving and credit facility to the poor and exploitation of untapped business
potential of rural areas.

Some micro finance institute working in India are describes below-

GRAMEEN BANK:
For the benefit of the rural people. It is a old model of micro-finance.

SHG:
SHGs are a small group of rural poor, who have voluntarily come forward to form a group for
improvement of the social and economic status of the members. Homogeneous group of about 15
to 20. Every member to save small amounts regularly. It gives loan. Women benefitted.

Joint Liability Group (JLG):

It is a group of individuals coming together to borrow from the financial institution.

SAKHI: SAKHI (An Organization for Women), established in the year 2002.the get support
from World Bank.

Role and function of SAKHI

• Provide loan to the economic disadvantage people.
• Help them in creating groups.
• Provide them Micro plus loans.
• Help them in establishing their (borrowers) business.

K) Role of NGO:
Small, unregulated NGOs have a long-run role to play in providing financial services to the very
poor and remote rural areas, either through linkages to more commercial rural financial institute
or as channels for targeted support.

Insurance:
Credit supply is not only the way of diminishing the poverty and poor condition of rural people.
For this reasons government of India initiated many programme to covered the poor people
under insurance to secure their life and health. Aam Admi BimaYojona, Rastriya Swasthya Bima
Yojona by all these scheme government of India with the help of financial institute try to
support rural people mainly BPL, Women and others financially backward class. Financial
institute also initiate different insurance scheme like Farm Income Insurance Scheme ,Crop
Insurance ,Livestock insurance to prevent them from loss of sudden adverse natural disaster and
misshapen.

ALTERNATIVE BANKING
 ➢ In addition of all of the above to deliver the financial facility to the core of the rural areas
where opening of branch is impossible the entire financial institute creates two new
model posts
1. Business facilitator
2. Business correspondent

Difference activities of these officials are given bellow:

Business Facilitator Business Correspondent

Scope of Activities: Scope Financial

of Activities:
Non –Financial
Services Services as
‘Pass’
• Borrower identification • Through
Disbursal of small value loan
• Collection processing and submission • Recovery of principal and interest.
of • Sale of insurance and mutual fund
Application. product.
• Preliminary appraisal • Collection of small deposits in due
• Marketing of financial product course of time
• Promotion and Nurturing SHGs
• Follow up of recovery

With all these initiative financial institute can bring a positive change in poverty i.e. poverty
reduce to a great extent.
References:
1. “Indian Economic Panorama”- monthly magazine.
2. Pratiyogita Darpan “General Studies - Indian Economics”.
3. “Kurukshetra” monthly review.
4. “Rural banker” by SBI.
5. Report of “Pragathi Garmin Bank”
6. Rural Development: From Vision to Action –a strategy report-1997.