Draft Report of the High Level Group on Services Sector

Financial inclusion

The Group recommends the following measures to facilitate the growth of micro finance institutions:

(i) measures to promote transparency in microfinance operations such as annual registration, rate monitoring and quarterly rate disclosures, and random audits; (ii) refraining from interest rate caps in microfinance, which have sometimes been imposed at the state level; (iii) measures to facilitate the development of non-credit services – savings, insurance, pensions etc. through regulatory support for pilots and hybrid models; (iv) a strong focus on urban microfinance to provide services to growing numbers of urban poor; and (iv) incentives that allow non-traditional players with strong rural presence and distribution networks to explore options to provide financial services.

The poor financial health of rural financial institutions primarily entrusted with providing credit to the priority sector is testament to the fact that these guidelines need to be seriously reconsidered if they are to meet their originally envisaged goals. The key challenge faced by financial services providers relates to the cost of doing business and enabling credit, recovery and distribution infrastructure. Suggested measures could include allowing banks to self-set inclusive financial service targets, developing enabling infrastructure such as low-cost payment systems and credit bureaus, making priority sector lending obligations tradable, and using well targeted subsidies for specific areas where standalone operations would not be viable, but which are priorities from a policy perspective.

There is a need to generate demand for financial services by improving the infrastructure for rural lending in partnership with the private sector wherever feasible.