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Scaling-up microfinance for India's rural poor

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  • Basu, Priya
  • Srivastava, Pradeep
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    Abstract

    This paper reviews the current level and pattern of access to finance for India's rural poor and examines some of the key microfinance approaches in India, taking a close look at the most dominant among these, the Self Help Group (SHG) Bank Linkage initiative. It empirically analyzes the success with which SHG Bank Linkage has been able to reach the poor, examines the reasons behind this, and the lessons learned. The analysis draws heavily on a recent rural access to finance survey of 6,000 households in India undertaken by the authors. The main findings and implications of the paper are as follows: India's rural poor currently have very little access to finance from formal sources. Microfinance approaches have tried to fill the gap. Among these, the growth of SHG Bank Linkage has been particularly remarkable, but outreach remains modest in terms of the proportion of poor households served. The paper recommends that, if SHG Bank Linkage is to be scaled-up to offer mass access to finance for the rural poor, then more attention will need to be paid toward the promotion of high quality SHGs that are sustainable, clear targeting of clients, and ensuring that banks linked to SHGs price loans at cost-covering levels. At the same time, the paper argues that, in an economy as vast and varied as India's, there is scope for diverse microfinance approaches to coexist. Private sector microfinanciers need to acquire greater professionalism, and the government can help by creating a flexible architecture for microfinance innovations, including through a more enabling policy, legal, and regulatory framework. Finally, the paper argues that, while microfinance can, at minimum, serve as a quick way to deliver finance to the poor, the medium-term strategy to scale-up access to finance for the poor should be to"graduate"microfinance clients to formal financial institutions. The paper offers some suggestions on what it would take to reform these institutions with an eye to improving access for the poor.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3646.

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    Date of creation: 01 Jun 2005
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    Handle: RePEc:wbk:wbrwps:3646

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    Related research

    Keywords: Banks&Banking Reform; Financial Intermediation; Environmental Economics&Policies; Financial Crisis Management&Restructuring; Public Sector Economics&Finance;

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    References

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    1. Hashemi, Syed M. & Schuler, Sidney Ruth & Riley, Ann P., 1996. "Rural credit programs and women's empowerment in Bangladesh," World Development, Elsevier, vol. 24(4), pages 635-653, April.
    2. Xavier Gine & Pamela Jakiela & Dean Karlan & Jonathan Morduch, 2006. "Microfinance games," Framed Field Experiments 00150, The Field Experiments Website.
    3. Morduch, Jonathan, 1999. "Between the State and the Market: Can Informal Insurance Patch the Safety Net?," World Bank Research Observer, World Bank Group, vol. 14(2), pages 187-207, August.
    4. Seibel, Hans Dieter, 2001. "SHG banking: A financial technology for reaching marginal areas and the very poor : NABARD's program of promoting local financial intermediaries owned and managed by the rural poor in India," Working Papers 2001,3, University of Cologne, Development Research Center.
    5. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
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    Cited by:
    1. Katsushi S. Imai & Samuel Kobina Annim, 2010. "Microfinance and Household Poverty Reduction: New evidence from India," Discussion Paper Series DP2010-14, Research Institute for Economics & Business Administration, Kobe University.
    2. World Bank, 2007. "India - Jharkhand : Addressing the Challenges of Inclusive Development," World Bank Other Operational Studies 7739, The World Bank.
    3. Geoffrey N. Keim & Beth Anne Wilson, 2007. "India's future: it's about jobs," International Finance Discussion Papers 913, Board of Governors of the Federal Reserve System (U.S.).
    4. Thapa, Ganesh, 1. "Sustainability and Governance of Microfinance Institutions: Recent Experiences and Some Lessons for Southeast Asia," Asian Journal of Agriculture and Development, Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA), vol. 3(1).
    5. Garikipati, Supriya, 2008. "The Impact of Lending to Women on Household Vulnerability and Women's Empowerment: Evidence from India," World Development, Elsevier, vol. 36(12), pages 2620-2642, December.

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