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Financing Rural India, Strengthening the Nation's Core

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Gurmeet Singh, Director, InditradeVillages in India contribute close to 46 percent of the country's Net Domestic Product and employ over two-thirds of the working age population. If we seek sustainable growth, we must ensure adequate formal sector finance for the steady development of enterprises and farmers in the rural areas.
According to the last Census of India's Population which was conducted close to a decade ago in 2011, 68.8 percent of the country's population and 72.4 percent of its workforce lived in rural areas. Naturally, over time, and with rural-urban migration and reclassification of rural settlements into urban, alongside various initiatives such as the Smart Cities mission amongst others, there has been a steady transition to urbanization over the years. This has culminated in a declining trend in the share of the rural population, workforce and GDP contribution. Nevertheless, population projections (United Nations 2012) indicate that India will continue to be predominantly rural till the year 2050, after which urban population is estimated to overtake the rural population.

Relevance of rural credit
A distressing fact related to our rural population is that of the bottom 20 percent of India's income quintile, 89 percent live in rural areas (ICE 360° Household Survey - 2016). There is an urgent need to improve the economic scenario in rural India to have a sustainable and robust growth model for the country as a whole. In addition to agriculture and agriculture-allied sectors, the rural area comprises numerous manufacturing and service sector SMEs, construction, logistics, and others. All these segments have the potential to generate income and employment for rural India, but are handicapped by very low access to formal financial sector credit.

Government initiatives
Over the years, the government has introduced various schemes and measures to increase the flow of credit to the agriculture and MSME sector through bank mandates and budget allocations. Notable amongst these have been the priority sector lending targets of banks, the interest subvention scheme which makes available to farmers short term crop loans, bank waiver of margin/security on small agri-loans, the issue of Kisan Credit Cards (KCC) to all eligible farmers and General Credit Cards (GCC) to non-farmers, and others. The most sweeping amongst these has been the adoption of
Aadhaar as a unique identification for financial purposes. It has enabled the opening of Jan Dhan accounts, the first step towards drawing those outside the formal financial sector into it, as well as ensuring that benefits reach those that they are intended for.

Private Sector Participation
The private sector too has recognized the potential of the rural and semi-urban segments of the country, which have been financially neglected or underserved until now. A chick-en and egg situation prevailed, wherein farmers and small business entrepreneurs without any formal financial sector credit history were denied credit; at the same time, because they were denied credit, there was no scope to build any formal financial sector credit history. Additionally, to offer small ticket loans to SMEs and small farmers/stockists in far flung areas, especially when their net cash flows were not very visible, became a challenge for larger, more established financial institutions.

Digital solutions
With the advent of fintech companies and the rise of tech-savvy NBFCs, all this has changed and effective tech solutions are emerging. For instance, one of the biggest bottlenecks that farmers and agricommodity stockists faced was the lack of adequate finance at crucial points in the crop cycle. This left them vulnerable to distress sales. To overcome this constraint, Inditrade offers flexible working capital financing through a technology-driven, integrated process in which it facilitates everything from appointment of collateral management agencies for stock evaluation and management, stock checking, application and closure of the loan against the commodities to partial withdrawals and loan extensions online.

At the SME level, using proxy variables and algorithms, it has become possible to gauge the credibility of small borrowers. Further, using technology has improved the reach and transparency of products and brought-down the costs. It has also facilitated customization of products to match the cash flows of borrowers and simplified tracking of repayment, which can now be made online. Here again, for in-stance, Inditrade disburses and recovers micro-finance based on a completely digitized process from identification, KYC formalities and credit checks to sanctions and disbursements and finally collection (predominantly a fortnightly collection model with the option of weekly & fortnightly collection available, based on customer business) and servicing (in-depth training of customers and frequent interaction with them through regular fixed interval meetings). This model has the ability to service up to 5000 household within a radius of 25km in semi-urban areas and 30km in rural areas.

Future of Rural Finance
All these factors have contributed towards making credit to those in the rural areas more accessible. However, looking ahead, a report titled `The Future of Rural Finance in India' by the National Institute of Rural Development and Panchayati Raj concludes, after drawing attention to the issues pertaining to the future of India's rural finance, while staying clear of the issues that have been discussed obsessively in the past ­ mainly provision of credit to farmers at ever lower interest rates, that unless we craft a superior rural financial system to serve future needs, both society and the state will face severe problems. These problems will emanate from the demographic realities of India, with over 600 million women not having access to even a small amount of credit for economic activities, over 300 million young people to be educated, skilled and employed, and over 100 million elderly already among us. It has demonstrated that these same demographic numbers offer a great opportunity to build a new range of financial services, going well beyond crop credit and credit to non-farm enterprises.