Transition and Innovation in Rural Finance in India A Call for Action in this Golden Decade
Social Science Research Network
BASIX, Hyderabad, India "...A moment comes, which comes but rarely in history, when we step out from the old to the new, when an age ends, and when the soul of a nation, long suppressed, finds utterance. It is fitting that at this solemn moment we take the pledge of dedication to the service of India Abstract This paper attempts a grand review of rural finance in India since ancient times till 2010 to answer one simple question -what are the lessons from the past and how can we apply these to
... we apply these to redesigning and revitalising the rural financial system (RFS) in this decade -2010 to 2020? Our review shows that the main purpose of the RFS has been to manage the primary paradox -that of the need to expropriate the rural surplus, and the need to accumulate and re-invest it. Over different historical periods, either expropriation or reinvestment took precedence, based on the exigencies of the state and the enlightenment of the rulers. As the RFS became more and more institutionalised, a stage came when a secondary paradox emerged -that of the need for ensuring institutional sustainability versus the need for financial inclusion. The secondary paradox was driven by the price (lending interest rates, savings interest rates, insurance premia, etc.) that could be charged to remain in business versus the transaction cost of broadening and deepening inclusion. If prices are lowered below breakeven levels, so as to enhance inclusion, by serving those who cannot afford the higher prices, then it affects the sustainability of financial institutions. On the other hand, if prices are raised in pursuit of profitability and institutional sustainability, it leads to massive exclusion. The breakeven point for a financial institution depends on its cost structure, which is itself a function of regulation, volume and technology. As an increasing proportion of the population is seeing higher income levels, the volumes of financial transactions are going up and costs coming down. On the other hand, improvements in technology such as core banking system software and hardware, tele-connectivity and biometric identification, are leading to a reduction in transaction costs. Finally, regulation is beginning to state inclusion as a goal.