Challenges of rural credit and savings in emerging economies: a comparative study; developing a credit bureau

Abstract

We started the project by studying the various mechanisms in practice to provide banking services to the poor. We examined the options available and evaluated the problems that rural and poor people are facing with respect to credit availability and saving options. There are various agencies, governmental and NGOs who provide micro-credit to urban and rural poor and farmers. They are concentrated in certain areas and competition among the MFIs is increasing. On the savings side there are few options for the poor especially in rural areas due to there are very few formal institutions operating there and this need is mainly being served by post office and co-operative banks. To get a first hand experience, we interacted closely with Grameen Koota, a Bangalore based MFI. We also visited a SHG meeting in a remote village. Through this we realized that MFIs are concentrated in the same area; and in those regions there is an issue of multiple borrowing leading to greater capital availability but also greater indebtedness. The main criteria for awarding bigger loans would be successful repayment of earlier loans. There is close to 100%repayment records, higher than the formal sector in some cases. There is pressure on MFIs by investors and banks (priority sector lending from RBI) to expand the business that is leading to over-indebtedness. We also found a lot of issues which need serious attention and a strong need for reform and the right focus from the government, RBI and NABARD to solve these issues which they seem to be ignoring as they are not so apparent at present and are suppressed because of the huge growth rates in the sector. We clearly saw the need for and recommend establishing a Credit Bureau to address some of the issues. We examined few developing countries with a long history of Micro Finance and drew parallel from Social crisis in Bolivia. The second part of the report covers the key aspects for Establishing Credit Bureau in India.