INT. J. NEW. INN.

, 2012, 1(1), 232-235

ISSN:2277-4459

FINANCIAL INNOVATIONS: CHANGING RURAL FINANCIAL SYSTEM IN INDIA

Jalbir Jakhar1, Savita Goyal1
1

Advanced Institute of Technology and Management

ABSTRACT
Making improvements in the financial sectors of developing countries contribute significantly in achieving the global development. A significant body of research shows that development of a viable financial sector is vital for both economic growth and poverty reduction. However, a number of studies show that the financial needs of agriculture-dependent rural communities remain largely unmet despite new approaches and expansion of the microfinance sector. Such studies imply that the positive impact of rural finance on growth, poverty and livelihoods is limited by the weakness of rural financial markets. To shorten these weaknesses and for the betterment of Indian rural finance system, no. of innovative financial services are provided in rural areas. This paper examines the issues that need to be considered to make rural finance more readily available and beneficial to the poor in developing countries and also highlights some innovative financial services implemented for improving rural finance systems.

1. INTRODUCTION
Financial sector development of a country promotes economic growth of that country. A study of 150 countries noted that a well-functioning financial system is critical to long-term growth. Empirical evidence from additional studies confirmed the strong, positive link between national savings (aggregate income less total expenditure) and economic growth (World Bank, 2004). Savings are important as they allow households to maintain precautionary balances against shocks. Households can also build up cash collateral and a track record of saving will allow them easier access to credit (Marr and Onumah, 2004). Most rural communities lack secure and accessible deposit facilities and, consequently, savings are held as cash or assets (e.g. livestock and building materials). Such savings are harder to mobilize and do not increase availability of loanable funds. Rural entrepreneurs therefore find it difficult to access funds and have to rely largely on self-financing when they want to invest. The development of India depends largely on the development of rural areas as 70% of the Indian population lives in rural areas, so economic growth must expand beyond city centers to include the entire country. 232

Indian rural financial market is fragmented and unable to meet the finance needs of the rural population, especially for investing in agriculture, the predominant sector. This is not only because of weaknesses in the financial institutions, but more critically because of constraints in the rural financial environment. These include disparities in ability to access information and high and covariant risks in rural areas, especially in agriculture. Rural households often lack the resources they need to mitigate risk. Rural borrowers therefore present a high credit risk and this combined with the high administrative costs of service delivery; make the rural market unattractive to formal financial intermediaries. In order to enhance the quality of rural livelihoods still a more holistic approach of development is needed. Governments need to design and implement agriculture friendly polices that encourage the development of financial sector and market oriented enterprises and to maintain a stable macro economy, an essential factor for the development of efficient financial markets. Governments and donors should invest into human and institutional development in rural areas. Particular attention should be paid to the role of the state and donors in promoting new systems. Specific areas of attention include: exploring the feasibility of financial International Journal of New Innovations