Economics and Rural Finance

ABSTRACT:  

 The main goals of this paper is to understand rural banking and its services; state case studies and brief an implementation strategy by analyzing problems faced by the poor due to inefficient policies.

INTRODUCTION:

Rural banking is a service provided to people who are far away from banking institutions and aid them in carrying out financial transactions. Regional Rural Banks (RRBs) were set-up in 1975 to bridge the gap in the flow of credit to the rural poor. They are supervised by NABARD (National Bank for Agriculture and Rural Development) . Besides the RRBs, commercial and co-operative banks have also started operating. The main objective of rural banking is to provide microfinance. MFIs employ several innovative contractual devices, including group lending, progressive lending, short-term contracts, and targeting of women, in efforts to overcome the obstacles that have traditionally discouraged lending to the poor. In spite of this entire stratagem there is an inevitable clash of interests between borrowers and institutions.

CASE STUDY 1

SHYLOCK VS. ANTONIO: INFORMAL MONEY LENDING IN RURAL COMMUNITIES IN THE JAMAN , NORTH DISTRICT, GHANA

-SIMON MARIWAH

The study, performed in a rural setting, found that the rural farmers borrowed at a rate of 100% per annum from local moneylenders and in default lost their cocoa farms (one of their major livelihood asset). Meanwhile, respondents though aware of the existence of bank loans at lower interest rates weren’t willing to access it due to perceived complexities (relating to delays and collateral).

CASE STUDY 2

MICROFINANCE IN ANDHRA PRADESH,INDIA IN THE WAKE OF GOVERNMENT SANCTIONS: A LOOK AT INSTITUTIONS AND BORROWERS  

 - KESHAV GARUD 

This case study presents an overview of challenges faced by the borrowers of microfinance in Andhra Pradesh in the light of 2010 crisis. The government speculated that the institutions were reaping excess profits by charging high interest rates and thereby compelled them to scale back on operations and also induced mass defaults. As a result, SKS stocks plummeted. 

In the slums, as a result of not having loans, businesses began to falter and most people were running on negative profit(while they could finance for their business needs, they could no longer save). They had to cut down on consumption and lower their economic standards. One household even had to stop sending their son to school.

ANALYSIS:

While the first case study gives us an insight into the problem at the grass-root level; the second sub monishes us for a preponderant model. Studies conducted by analysts from both the case studies suggest that:

1      The rural poor prefer informal lenders because of personal acquaintance.

2     Despite high interest rates, the rural sector and slums still consider microfinance as beneficial in alleviating poverty

   It is therefore important for us to realize that microfinance is used for a variety of reasons and is very complex as its roots are deeply intertwined with poverty. Studies also show strong correlation between bank accounts and income.

STRATEGY:

A survey shall be conducted and on the basis of financial status and credit affordability the population must be divided into two major categories: ultra poor and poor.