An empirical analysis of the lived experiences of more than 2,000 households in different Bangalore slums shows how migration patterns, living conditions, livelihood strategies and prospects for the future vary widely across distinct types of slums that were initially identified from satellite images and studied over a 10-year period. Shocks and responses vary in nature and intensity, and coping and accumulative strategies diverge across slum types. More finegrained policy analyses that recognize this diversity of slum types will help people deal with shocks and increase resilience more effectively.
In recent times, microfinance has emerged as a major innovation in the rural financial marketplace. Microfinance largely addresses the issue of access to financial services. In trying to understand the innovation of microfinance and how it has proved to be effective, the author looks at certain design features of microfinance. He first starts by identifying the need for financial service institutions which is basically to bridge the gap between the need for financial services across time, geographies, and risk profiles. In providing services that bridge this gap, formal institutions have limited access to authentic information both in terms of transaction history and expected behaviour and, therefore, resort to seeking excessive information thereby adding to the transaction costs. The innovation in microfinance has been largely to bridge this gap through a series of trustbased surrogates that take the transaction-related risks to the people who have the information — the community through measures of social collateral. In this paper, the author attempts to examine the trajectory of institutional intermediation in the rural areas, particularly with the poor and how it has evolved over a period of time. It identifies a systematic breach of trust as one of the major problems with the institutional interventions in the area of providing financial services to the poor and argues that microfinance uses trust as an effective mechanism to address one of the issues of imperfect information in financial transactions. The paper also distinguishes between the different models of microfinance and identifies which of these models use trust in a positivist frame and as a coercive mechanism. The specific objectives of the paper are to: Superimpose the role of trust in various types of exchanges and see how it impacts the effectiveness of repeated transactions. While greater access to information fosters trust and thus helps social networks to reduce transaction costs, there could be limits to which exchanges could solely depend on networks and trust. Look at the frontiers where mutual trust cannot work as a surrogate for lower appraisal costs. Use an example in the Canadian context and see how an entity that started on the basis of social networks and trust had to morph into using the techniques used by other formal nonneighbourhood institutions as it grew in size and went beyond a threshold. Using the Canadian example, the author argues that as the transactions get sophisticated, it is possible to achieve what informal networks have achieved through the creative use of information technology. While we find that the role of trust both in the positivist and the coercive frame does provide some interesting insights into how exchanges with the poor could be managed, there still could be breaches in the assumptions. This paper identifies the conditions under which the breaches could possibly happen and also speculates on the effect of such breaches.
In India, when we talk about rural finance, the stereotype offered is that of a banking system that fails to reach out to the poorer clients and, when it does, fails to recover the money so disbursed. The counter-point offered is usually the magic wand of microfinance. This Colloquium was an interface between leading bankers and microfinance practitioners in India to examine where these two worlds meet and how they could learn from each other. The discussions were organized around three themes: a) the legacy of the banking system, b) the limitations of microfinance, and c) an assessment of the potential. On the issue of legacy, the message was clear that the intervention of the state in certain aspects has been undesirable. These areas were clearly identified as granting general pardon for loans, tinkering around with interest subsidies, and interfering with the commercial aspects of banking. The limitations of the microfinance institutions were in terms of their sustainability and their inability to draw commercial capital and grow rapidly. However, these limitations were partly seen as a consequence of regulatory apathy and support from the state both in terms of formulating and articulating a regulatory framework and also in terms of the central bank being reluctant to supervise the efforts. These did not help in enhancing the legitimacy of microfinance institutions. The participants saw a great potential in the rural markets which were beyond agriculture. The emerging sectors were identified as construction, non-farm enterprise, handloom, clusters that involve garment making and quarrying, etc. According to them, there was scope for both the banks and the microfinance institutions to intervene. The following points emerged from the discussion: Rural finance has suffered from interventions from the state in the past. While some interventions have been positive, they have harmed the sector when compromises such as write-offs have been made. Microfinance has emerged as an important mechanism to reach out financial services to the poor. There are interesting lessons from this for the banks to adopt. There are problems for the microfinance institutions in the form of regulatory and supervisory apathy. This leads to financial exclusion of large segments of the poor. There is a huge market for financial services — both loans and savings. Innovations across the world indicate important breakthroughs in delivery of financial services. These can be implemented provided the regulatory impediments are removed. The issue of risk management has to be systematically addressed. The role of the state, wherever positive, has been effective and, therefore, this should be sharply defined to see how the state could contribute to this sector. The issue of interest rates continues to be vexatious and needs to be addressed urgently.
The policy intervention in agriculture has been credit driven. This is even more pronounced in the recent interventions made by the State in the package announced for distressed farmers, in doubling agricultural credit, providing subvention and putting an upper cap on interest rates for agricultural loans. We use existing literature and data to argue that the causality of agricultural output with increased doses of credit cannot be clearly established.We argue that Indian agriculture is undergoing a fundamental change wherein the technology and inputs are moving out of the hands of the farmers to external suppliers. This, over a period of time may have resulted in the deskilling of farmers and without adequate public investments in support services and without appropriate risk mitigation products, has created a near-crisis in agriculture. Thus, we argue that policy interventions have to be necessarily patient and holistic.Looking specifi cally at the rural fi nancial markets using some primary data, we argue that it is necessary to understand the rural fi nancial markets from the demand side. We conclude the article by identifying some directions in which the policy intervention could move, keeping the overall rural economy in view rather than being focussed only on agriculture.
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