Fine-grain Finance: Financial Choice and Strategy Among the Poor in Rural North India

This report describes the financial life of residents of two villages in Koroan, Allahabad District, Uttar Pradesh. Research finds that size of landholding is still the critical indicator of wealth and status and greatly influences access to cheap bank finance and tries to explain limited opportunities and relevance of formal microfinance service providers.

The research demonstrates that:

• The use of informal mechanisms like reciprocal gifts, interest-free lending and borrowing and taking credit in kind from shopkeepers is widespread and does not decrease with increasing wealth;
• Use of bank credit is open only to a minority whose landholdings are generally above 5-7 acres. Because of its low price, the quantities provided and increasing convenience, bank credit provides a significant advantage to those farmers to whom it is available;
• Cashpor has lent profitably to a large section of the landless through substituting security with peer pressure and track record. However they neither reach farmer-labourers whose borrowing needs are more intermittent nor the minority of 'self-starter' entrepreneurs who reside in villages where there are not adequate numbers to make a viable Centre and excludes many small and marginal farmer-labourers on the grounds that they are too wealthy;
• The exclusion of many farmer labourers from institutional finance is a symptom of the limitations of agriculture in the region and of the concentration of government support and privilege in the hands of a minority landed elite.
• To become a force for change, banks will need to increase their outreach, even within the agricultural sector, and develop policies and products which promote innovation and higher value cropping:
  • These might include financing the development of market and storage infrastructure for cash crops, tie-ups with seed and buy-back companies and schemes to facilitate the purchase and lease of land.
• Cashpor's contribution to the development of the off-farm sector could be enhanced through a diversification of portfolio to larger clients (with higher investment capacity) and focus on the small-scale but intensive on-farm or horticultural sector which is so far neglected by the banks;
• Savings products which permit intermittent payment and combine the right mix of flexibility and discipline, while also offering protection from shocks through insurance links, could play a critical role in consumption security for the poorest among the farmer-labourer class.