Should Indian Microfinance Companies have access to Priority Sector Funds ?

By Ramesh S Arunachalam , Rural Finance Practitioner

Introduction: Priority sector lending is the public face of the policy support to financing low income people and sometimes, it gets more attention than required, and perhaps for the wrong reasons. My views on priority sector lending are given below…

Policy Context : Directed Credit and Financial Inclusion: However, before looking at the priority sector funds issue, it seems important to look at the overall policy environment in which priority sector financing is a major tool – for enhancing access of low income people to financial services – under the long standing directed credit paradigm, now subsumed by recent financial inclusion paradigm. A critique and analysis of the same is provided below…

In India, typically, financial inclusion (FI) is presently characterized by:

  • Preoccupation With Opening of Savings Accounts: The jist of this approach is that it deals with enabling low-income people to have access to bank accounts and remittance services. Thereafter, it is assumed that, many benefits will automatically follow – often proved to be killer assumption, in development parlance
  • Large Focus on Consumption Credit and Small Production Loans: While institutions (mostly MFIs) have provided low-income people and women with access to financial services, the focus has largely been in terms of delivery of credit. And within credit, the focus, at least over the last few years, has largely tended to be on consumption loans – small production loans do exist but appear rather small in number (pun intended), especially in relation to consumption loans. This constitutes the bulk of what we typically call as priority sector financing with regard to MFIs, often coming under the micro-credit category[i]

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