Since the early national plans, successive governments in independent India have emphasized the link between improving access to finance, and reducing poverty - a stance that has had influence globally. The need to improve financial access for India's poor, the overwhelming majority of whom are concentrated in rural areas, motivated the nationalization of commercial banks in the late 1960s, and an aggressive drive through the 1970s and 1980s, to expand rural banking, coupled with policies mandating banks to provide subsidized credit to rural households. The 1990s saw the partial deregulation of interest rates, a gradual reduction in the Government's stake in commercial banks, and increased competition in the banking sector. Access to finance for the rural poor has improved somewhat over the past decades, with the public sector commercial banks being the dominant players in the formal rural finance market. Yet, the vast majority of India's rural poor, still do not have access t o formal finance. The report examines the reasons, and factors affecting both banks, and their clients. First is the problem of uncertainty - about the repayment capacity of poor rural borrowers, and their irregular/volatile income streams and expenditure patterns - which, in the absence of credit information, drive up default risk. Second, the transactions costs of rural lending in India are high, mainly due to small loan sizes, high frequency of transactions, large geographical spread, and heterogeneity of borrowers, and widespread illiteracy. Third, the Government policies have made things worse from the banks' perspective, creating a "financial climate" not conducive to lending in general, and rural banking in particular. New approaches and products to improve rural access to finance in India are reviewed, namely, the 'Self-help Groups (SHGs) Bank Linkage' model, the growth of which - from just 500 SHGs linked to banks in the early 1990s, to over 700,000 in 2003 - has been truly remarkable; specialized microfinance institutions; and, partnerships between private Banks,, micro-financiers, and service providers, including the Kisan Credit Card. Furthermore, a potential means of reducing default risk in rural finance, that has recently caught the attention of the Government, is the establishment of a "warehouse receipts system' to cover the agricultural risk management of products for farmers. The policy agenda to improve access to finance by the rural poor looks at introducing flex...
