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The Outreach/Viability Conundrum: Can India’s Regional Rural Banks Really Serve Low-Income Clients?

Working paper

Working paper

The provision of formal financial services in rural India has traditionally been the domain of government-owned financial institutions. Even in the mid-1990s, public sector institutions owned over 90% of the assets of the banking sector. Some 65% of the small loans sector (i.e. under US$ 4,200 [=Rs200,000]) is accounted for by public sector Regional Rural Banks, and the small (but growing) number of private and foreign banks have shown virtually no interest in the rural sector. A series of reforms in the late 1990s particularly affected the RRBs, infusing them with new capital, encouraging them to achieve better repayment levels, and allowing them to close down non-viable branches. Thus, whilst the majority of RRBs were incurring losses in 1996–7, by 2001 over 85% were earning current profits. But these improvements were in large measure attributable to a shift towards a wealthier clientele. A study by Economic Development Associates and Micro-Credit Ratings International Ltd for the Livelihood Options study sampled a total of 5 RRBs, three in a healthy financial condition, and two less so, one of which was located in a remote area. It sought to assess how far the apparent tension between coverage (especially of poorer clients) and financial viability was a real one.

Sanjay Sinha, Tanmay Chetan, Orlanda Ruthven and Nilotpal Pathak