Microfinance and the Poverty of Financial Services: How the Poor in India Could Be Better Served

This paper states that banking institutions in India have almost withdrawn from lending to the poor since the 1980s and the cooperative credit system does not function in large parts of the country. Discusses financial service provision using information from the financial histories of 20 low income families in the slums of Delhi and 28 families in two villages of Allahabad district of Uttar Pradesh. Examines the suitability of five possible financial services available locally from formal financial institutions:

• Farmers line of credit facility offered by the banks;
• Savings in the form of insurance with the Life Insurance Corporation of India;
• Savings services of a large private non-bank finance company;
• The deposit facilities of the post office;
• financial services provided by a large MFI operating in the study area.

Findings suggest that these formal services do not fully meet the needs of low income families, outreach to the poorest families is still relatively limited and they have to fall back upon the high cost informal finance and moneylenders. Papers' analysis and recommendations:

• Show that the needs of low income families would be best served by highly flexible financial services that enable the conduct of frequent transactions both for saving small sums and for borrowing for a variety of purposes at irregular intervals;
• Suggest a flexible microfinance product for banks -an adaptation of their farmers? line of credit specifically to the needs of low income clients;
• Suggest marketing of small insurance policies through the medium of MFIs and the introduction of a flexible savings-cum-credit facility by MFIs to serve the needs of the poor in a more appropriate way;
• Recommend further experimentation by financial institutions on the design of appropriate financial products for the poor.